Co-authored with “Hidden Opportunities.”

When investing in public companies, most of us individual investors have access to data that the company makes available. But there’s one class of investors that knows about undisclosed details like an upcoming merger or acquisition, hiring freezes and layoffs, entry into new markets, or the effectiveness/ success of internal strategies. Company insiders are these special investors with better visibility (and potentially oversight) into the operations.

According to the Securities Exchange Commission, an “insider” is an officer, director, 10% stockholder, and anyone who possesses inside information because of their relationship with the company or with an officer, director, or principal stockholder. This group of investors has some special rules regarding buying and selling shares.

• Most companies don’t allow insiders to “trade” the stock.

• Companies require Directors and Officers to pre-clear all trades and often employ a window where transactions are not permitted.

• Corporate insiders are required to report their transactions within two business days of the date the transaction occurred.

When we find companies where insiders own a significant number of shares, it tells us something. Legitimate insiders are interested in long-term gains, not quick fixes. Moreover, if a stock is known for its generous dividends, then high insider ownership makes a compelling case for payment sustainability and reliability through prudent strategy and execution.

“Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” – Peter Lynch.

Insiders buy because they see great potential or simply because they think their stock is undervalued. We will now discuss two excellent dividends where management has our back through massive insider ownership in the stock. Let’s dive in!

Precision in Pickings: EPD – Yield 7.6%

Enterprise Products Partners L.P. (EPD) owns and operates an integrated energy infrastructure network providing midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, refined products, and petrochemicals.

Note:

• EPD is a Master Limited Partnership that issues a Schedule K-1 to investors.

• Partnership issues are called units, and investors are termed unit holders. But to keep the discussion consistent and understandable, we will utilize conventional terms like shares and shareholders.

EPD maintains an A-rated balance sheet with peer-leading leverage of 3x and ample liquidity to support shareholder commitments and infrastructure expansion initiatives. The partnership ended Q3 with $3.8 billion in liquidity, including available credit capacity and unrestricted cash. 95.8% of EPD’s debt is at fixed rates, and the partnership’s total debt carries a 4.6% weighted average interest rate.

The management’s significant 32% ownership stake in EPD stock is a critical factor that should not be overlooked. With substantial insider ownership and consistent accumulation, EPD’s management is not just at the helm, but also personally vested in the company’s success, ensuring prudent strategies to enhance shareholder value. Source.

The common assumption that high yield comes at the cost of growth is swiftly debunked by EPD, which defies this logic from the outset. Source.

53% of EPD’s CFFO (Cash Flow From Operating Activities) was distributed, and 3% was utilized towards share buybacks. In June, the partnership made its 25th consecutive annual distribution increase by declaring a $0.50/share quarterly payment, a 5.3% YoY increase. With that, EPD joins the Dividend Aristocrat club, well-positioned to reward shareholders in the years to come. And then it followed up with a 3% raise to $0.515 this week. Notably, in TTM Q3 2023, EPD repurchased ~8.5 million shares for $213 million under the partnership’s $2 billion share buyback program from 2019 ($823 million has been utilized to date).

EPD’s operations are primarily fee-based, bringing relative insensitivity to commodity price fluctuations.

With an ongoing expansion of monetizable assets, distribution growth, share buybacks, and substantial insider ownership, EPD ticks all the boxes for value investors. It offers a well-covered 7.6% yield, making it an enticing choice to ride along as the world increasingly seeks reliable energy storage and transportation.

Venture into Victory: RILY Bonds, 7%-9% Current Yields – Up To 20% YTM

B. Riley Financial, Inc. (RILY) is a financial services firm with a beaten-up stock and an ironic specialty in salvaging beaten-down companies. Born in 1997, RILY focuses on smaller companies that don’t get much attention from Wall Street. The firm has a birth-to-death business model that includes stock and bond offerings, consulting, restructuring, mergers, turnarounds, bankruptcies, and retail liquidations.

RILY common stock has an uncomfortably-high short interest, and has lost more than half of its value in recent months largely due to exaggeration of the situation with one of its investments, and an overall misunderstanding about the company’s operations.