Given the slow moving process of getting the economy back on track, the Federal Reserve has signaled that it plans to keep interest rates at historically low levels until 2014. For income seekers, that continues to be a problem. To that end, many have chosen to find solace and yield in dividend-paying stocks. Funds like the Vanguard Dividend Appreciation ETF (ARCA:VIG) have exploded in popularity and assets as the trend takes place. One ignored and overlooked cash-flow-rich sector might just be what income investors need to turn trash into treasure.
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Big Bucks in Garbage Trucks
Most Americans are blissfully unaware of what happens to the nearly 250 million tons of trash we generate every year. For those paying attention and operating in the $52 billion-a-year environmental services industry, it can mean some serious bucks. There's gold in that garbage.
By and large, homeowners aren't given the choice of what waste collection company to use. Citizens are "forced" to use the company that is under contract with their municipality or haul their trash to the dump themselves. Secondly, the waste management firms charge a set period fee regardless of the amount trash hauled. Most customers, especially individual households, pay the disposal companies the same amount whether or not their trash can is full every week. These factors allow the industry to produce some of most steady and recession resistant cash flows out there.
SEE: 4 Characteristics Of Recession-Proof Companies
The environmental services sector also features a number of growth elements as well. The long-term rally in commodity demand and prices is helping buy recycling programs at various waste management firms. A wide variety of industries, such as automobile fabrication and infrastructure, are relying more on recycled materials to help keep costs down. In addition, almost all consumer electronics contain an abundance of silver, platinum, lithium and rare earth elements. At the same time, the waste industry is "drilling the pile" and becoming energy producers by tapping into the methane gas created during the breakdown process in landfills. Many firms are now collecting this gas and burning it as a way to power homes and vehicles.
Overall, this blend of steady-eddy utility-like cash flows, coupled with various growth elements, have stocks in the sector producing some of the biggest dividends around.
SEE: 6 Common Misconceptions About Dividends Slideshow
While there are thousands of individual garbage companies, only a handful are publicly traded. The Market Vectors Environmental Services ETF (ARCA:EVX) can be used as an overall play on the sanitation theme. The fund tracks 21 different firms in the sector, including Waste Connections (NYSE:WCN) and hazardous waste specialist Stericycle (Nasdaq:SRCL). Overall, the fund has produced a 5.26% annual return since commencing in 2006. However, the fund only yields 1.23%. Better opportunities exist in individual firms.
Two of the biggest players in the industry are also two of the highest-paying waste stocks. Both Waste Management (NYSE:WM) and Republic Services (NYSE: RSG) currently yield 4.4% and 3.4%, respectively. Both have been active in the waste to energy space, with Waste Management featuring the more impressive landfill infrastructure network. The firm has managed to grow its dividend 8.85% over the last five years. Republic Services has also taken dividend growth to heart, increasing its payout by 15.78% over the same time period. Either firm makes a great first stop in the sector.
SEE: Due Diligence On Dividends
Finally, the average kitchen-sized bag of trash contains enough energy to power a 100-watt light bulb for 24 hours. That means there is plenty of fuel available to run Covanta's (NYSE:CVA) waste-to-energy plants. The company owns and operates 44 different landfill-power plants across the country and has recently been expanding into emerging markets like China and India. Producing that power is also big business, with Covanta seeing higher revenues and free-cash flow during the last quarter's earnings. Overall, shares of the emerging power play yield a healthy 3.8%.
The Bottom Line
While it is a dirty job, the waste management industry could be exactly what a portfolio needs in this time of low interest rates. Steady cash flows and dividends are hallmarks of the sector, with new landfill gas and recycling providing growth elements. The previous picks, along with Progressive Waste Solution's (NYSE:BIN) 2.9% yield, make ideal ways to add dividend payers to a portfolio.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
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