Stock With High Dividend Yield is Set in Stone

Nathan Slaughter's picture

Monday, March 27, 2017 - 12:00am

by Nathan Slaughter

I drove past my neighborhood Blockbuster store a few days ago. At least, that's what it used to be back when people still rented movies from brick-and-mortar retailers rather than stream them digitally. Now, the building is home to a fitness gym. 

It's hard to believe that in 2004 the company had a worldwide chain of 9,000 retail outlets that generated $5 billion in revenue. Just six years later, it was in bankruptcy court.

Of course, Blockbuster is by no means the only businesses that has fallen victim to disruptive new technologies and changing consumer behaviors. It's happening around us all the time. 

I could spend days citing examples of products and services that are in terminal decay or have already been rendered obsolete: laser discs, dial-up modems, answering machines, and floppy discs, just to name a few. Remember, these were all breakthroughs in their day.

Of course, we have the benefit of hindsight. But it's much harder to spot big changes before they start to occur, or even in the early stages. That inevitably means that we don't know which of today's stocks with high dividend yield will become tomorrow's has-beens. But rest assured, we will look back in a few years and wonder how anyone could have been dumb enough to put money in (fill in the blank).     

I'm not sure what companies might go in that blank. Time will tell. But I can almost certainly rule a few out. And these rare businesses deserve special attention from income investors. 

And the secret to any lasting dividend is a clean financial bill of health.

Death And Taxes 
Ben Franklin famously said that the only two certainties in life are death and taxes. Well, I won't argue with Ben. But as any kid could tell you, there just might be a third constant: school. 

There were countless changes between my parents' baby boom days in the 1950s and my formative years as a Gen X'er in the 1980s, and even more changes from then until today. I can't use a slide rule any more than my millennial kids would know how to operate a Sony Walkman cassette player. 

But there is one thing we all have in common. Between kindergarten and 12th grade, we all spent nine months a year in a classroom learning how to read and write. 

I won't even pretend to guess what the world will look like for the next generation in another 20 years. Thousands of businesses will undoubtedly come and go over the next couple decades. But one thing won't change... Kids in the future will still probably spend Monday to Friday learning the basic fundamentals of math, science and other subjects. 

Take a quick look at the chart below, which depicts the growth in K-12 public school enrollments.

Growth In K-12 Enrollments

Source: National Center for Education Statistics 

Growth investors may want to see a sharper slope to this chart -- but I love it. This may be the steadiest projection I've ever seen. There is almost zero deviation from year to year. The "market" won't increase much, but it sure won't decrease either. 

You can sleep easy knowing the risks of a market downturn are practically non-existent. That is, unless or some reason we decide to stop educating our children. Not likely. There is no such certainty with other industries such as retail or healthcare or energy, all of which ebb and flow. 

The question is, how do you profit from school attendance? 

Well, elementary and high schools are feeders for college, and tuition is getting increasingly expensive. So that could mean growing demand for student loans, like the ones being serviced by Navient (Nasdaq: NAVI), formerly known as Sallie Mae. 

Over the past decade, student debt has soared to $1.3 trillion from $517 billion. But that option is largely out, since the Obama administration nationalized student loans a while back and replaced private lenders with government programs. 

Housing is another option. After all, every student needs a place to crash, and dorms aren't always the answer. That line of thinking leads to companies like American Campus Communities (NYSE: ACC), which owns 200+ housing complexes on 96 university campuses -- whose rents support a decent 3.7% yield. 

You can also invest in charter schools through EPR Properties (NYSE: EPR). Enrollment in these alternative schools has risen 100% since 2007. EPR owns 67 public charter schools, is 100% leased and educates a combined 36,000 students daily. 

But my favorite way to invest in this trend is perhaps the simplest of all (yet, also one of the most overlooked). 

There are 50 million students that go to school each day, most of which arrive and depart by bus. And one of the most recent recommendations in my premium newsletter, High-Yield Investing, gets paid to do the driving. 

As you'll see, being a K-12 chauffeur has its advantages -- not the least of which includes the ability to offer a rich 8% yield to investors. 

Dividends Set In Stone
Founded in 1997,  my most recent High-Yield Investing  pick is North America's largest independent provider of student transportation services, operating in two dozen states from Florida to California to New York. 

Over the years, the company has won bid after bid from hundreds of school districts across the country. It currently has a fleet of 13,500 vehicles that serve 360 districts. Every day, it picks up 1.25 million students for school. And its loyal customers are satisfied -- as evidenced by a 95%-plus contract renewal rate over the past 20 years. 

This company doesn't have to worry about ringing up cash register transactions or dealing with fickle customer demand like, for example, Sears does. It has already entered into 240 school bus contracts that bring in guaranteed daily revenues -- regardless of economic conditions. The average contract has a duration of about five years. 

This business model is ideally suited to dividend payments. Any distribution is only as secure as the company's underlying cash flows. And these dividends are about as steady and predictable as they come. Hundreds of school districts (themselves typically backed by county tax revenues) pay fees each month for the company's services, rain or shine. 

And since there is no sensitivity to economic cycles, there is minimal deviation in cash flows from quarter to quarter. 

This allows about 70 cents from each dollar of profits to flow straight to investors' pockets. As an added bonus, payments are made on a monthly basis rather than quarterly, which helps your investment compound even quicker. Here's how dividends have looked the past two years. 

 

 

As you can see, dividends have been almost set in stone. Does this fixed payout structure remind you of another class of securities? This may be a common stock, but it sure walks and talks like a bond. 

Given the turbulence of today's markets, that's not a bad thing -- especially when the "coupon" rate stands at 8%.

But don't make the mistake of thinking the company's financials are equally flat. In fact, annual revenues have risen by more than 60% over the past four years to top $600 million in 2016. And cash flows have increased by nearly 70%. 

Whenever cash flows are growing faster than dividends, that means the company is paying out a smaller percentage of profits. And a slimmer payout ratio means a safer dividend.

The company is also poised for growth. Even as the industry leader, the company controls just a small sliver of this fragmented market. There are more than 10,000 school districts that still handle their own transportation fleets internally. Public schools own and operate approximately two-thirds of the nation's 500,000 school buses, many of which are aging and in need of frequent maintenance and repair. 

With new contracts, expanding profit margins, and projected 200% revenue growth in an untapped new transportation consulting unit, I have an optimistic outlook for this stock in 2017. 

But it wouldn't be fair to my premium subscribers to reveal the name of this exceptional company here. To get the name of this pick, and my other High-Yield Investing recommendations, some of which are yielding over 10%, I invite you to click here

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.