Coal stock Alliance Resource Partners offers a massive 14% dividend yield that could generate $500 in dividend income next year from a $5,100 investment today.
For decades, coal stocks were some of the most hated on Wall Street. But the COVID-19 pandemic changed everything. Now, constrained energy supplies have coal companies like Alliance Resource Partners (ARLP) producing huge dividends for investors.
Alliance Resource Partners’ Massive 14% Dividend Yield
Alliance Resource Partners (ARLP) currently pays a quarterly dividend of $0.70 per share. With the stock trading around $5, this works out to a massive dividend yield of 14%.
For investors, this could produce huge dividend payments in 2024. Here’s the math:
- Current ARLP Share Price: $5
- Quarterly Dividend: $0.70
- Annual Dividend (4 quarters): $2.80
- Annual Dividend Yield (at $5 share price): 14%
By investing $5,190 into 250 shares of ARLP at current prices ($20.76 as of 28 December, 2023), you would earn $700 in dividend income next year (250 shares x $2.80 annual dividend).
That’s a return of over 11% from dividends alone in 2024, not counting any potential stock price appreciation.
Why Coal Stocks Like ARLP are Now Offering Huge Dividends
For years, coal stocks were left for dead. With the rise of renewable energy, companies like Alliance Resource Partners were expected to slowly fade away.
But the COVID-19 pandemic changed the energy landscape overnight.
Constrained Energy Supplies
For over 3 years during COVID-19, global energy companies slashed capital spending. This reduced investment has left energy supplies tightly constrained, even as demand rebounded.
With less crude oil, natural gas, and coal available, prices for these energy commodities have surged. That’s been a huge benefit for producers like Alliance Resource Partners.
Surging Coal Prices
Alliance Resource Partners has seen coal prices soar far above historic averages during the pandemic. With high commodity prices, the company is generating up to $1 billion in annual operating cash flow.
These booming profits allow Alliance to pay its massive dividend. The company is estimating over $565 million in distributable cash flow in 2023 to cover its payout.
Smart Financial Stewardship
Unlike some coal peers, Alliance Resource Partners has not recklessly expanded production during boom times. The company has taken a conservative approach to avoid being swamped with too much debt.
Today, Alliance Resource Partners has a very manageable $173 million in net debt. With disciplined leadership, the company has maintained a strong financial position.
Securing Future Production
Looking ahead, Alliance Resource Partners has already booked coal production 3-4 years into the future. By committing future supplies at today’s high prices, the company locks in strong cash flow.
This ensures Alliance can maintain its dividends, even if coal prices decline in the years ahead.
Diversification Beyond Coal
While coal remains its primary business, Alliance Resource Partners has diversified into other energy sources:
Oil and Gas Royalties
The company has acquired royalty interests in oil and natural gas production. As with coal, today’s high oil and gas prices produce increased profits from these royalties.
Renewable Energy Investments
While still small, Alliance Resource Partners has invested in solar power generation. This includes an equity investment in a 180 megawatt solar facility.
This renewable energy exposure helps hedge Alliance’s coal business over the long-term. It also shows management’s forward-looking approach.
Is ARLP’s 14% Dividend Yield Safe?
With such a high dividend yield, is ARLP’s payout sustainable? There are reasons for optimism:
- Booming coal prices greatly exceeding costs
- Multi-year contracted coal sales
- Renewable energy investments
- Diversification into oil and gas royalties
- Conservative balance sheet management
- Dividend covered by distributable cash flow
Additionally, ARLP’s high yield could decline not due to a dividend cut, but because the stock price rises. With ARLP’s strong profitability, a higher valuation would lower the dividend yield.
Nonetheless, risks remain that could threaten Alliance Resource’s dividend coverage. Declining coal prices, reduced demand, or higher costs could pressure the company’s ability to maintain the high payout.
Prudent investors should view this ultra-high yield as potentially unsustainable. But under current industry dynamics, Alliance appears positioned to continue delivering huge dividends in the near-term.
Conclusion: Big Income Opportunity from a Left-For-Dead Coal Stock
After years of being left for dead, coal stocks like Alliance Resource Partners have been resurrected by the pandemic’s energy crunch.
Few companies offer the potential for a 14% dividend yield these days. While risks remain, Alliance’s payout looks viable for now given booming coal prices and management’s prudent stewardship.
Income-seeking investors should give this ultra-high-yield coal stock a close look. ARLP’s massive dividend could produce over $700 in income next year from a $5,100 investment.
For investors weary of rock-bottom bond yields, Alliance Resource Partners provides a high-income opportunity as the world continues grappling with constrained energy supplies.