investors looking for high-yield stocks all pretty much want the same thing: A steady cash stream. Maybe that cash stream is used to supplement income, or maybe it's a way of using reinvested dividends to build wealth over very long time horizons. Either way, the only way one can do that is to find companies that can reliably pay that high yield dividend.
We asked three of our contributors to highlight a stock they see as a dividend stock to buy in February. They responded with automaker Ford Motors (NYSE:F), oil and gas logistics company Enterprise Products Partners (NYSE:EPD), and electricity transmission specialist National Grid (NYSE:NGG). Here's a quick run-down as to why investors should take a look at these high-yield stocks.
Drive ahead with this dividend stock
Dan Caplinger (Ford): The auto industry has been doing extremely well in recent years, posting record sales in 2015 and 2016, and automakers like Ford (NYSE:F) have taken full advantage of the favorable conditions to keep profits at high levels. Ford earned $7.37 billion in 2015, and on a trailing basis, the automaker's earnings over the four most recent quarters stayed near that level, at $7.25 billion.
Yet Ford stock has performed poorly. Investors anticipate that extremely strong sales conditions won't last forever, expecting a normal cyclical decline that will eventually put pressure on Ford's current high earnings. As a result, the stock now trades at less than eight times forward earnings estimates, and most investors expect that when final numbers for 2016 are available, earnings will be down by high single-digit percentages compared to 2015. Moreover, those following the stock are also looking for similar declines in 2017.
However, one area where Ford still stands out is its dividend. The stock currently yields 4.7%, and Ford added an extra $0.05 per share in supplemental dividends earlier this month that boosted the effective yield above the 5% level.
Low share prices make Ford's dividend extremely attractive. With the company paying out just a third of its current earnings in dividends, Ford has plenty of room to sustain and even grow its payout over time, even if a cyclical downturn does put pressure on its bottom line going forward.
A high-yield stock the energy rally left behind
Tyler Crowe (Enterprise Products Partners): If you started positions in oil and gas stocks in 2016, then boy did you have a good year. Oil, natural gas, and their product derivatives were four of the five best-performing commodities last year, and energy stocks were the best-performing sector of any stock index. One has to question, though, whether or not those companies can live up to those expectations again in 2017 if the oil price recovery stalls out.
Even though the industry as a whole had a decent year, one company that curiously didn't see much of a gain was Enterprise Products Partners, one of the largest U.S. oil and gas transportation and logistics companies. While the boarder market was positing a better than 20% gain, Enterprises stock gained a modest 2.3% in 2016. That was even despite the fact that the company brought $2.2 billion worth of new assets online that operate with fixed-fee, minimum volume protected contracts that ensure strong cash flow growth. Consistently bringing these kinds of assets online is the reason the company has been able to deliver 50 consecutive quarters of distribution growth.
Since the company's stock had such a lukewarm performance in 2016, shares currently trade at a price to distributable cash flow of 14.0 times -- one of the lowest among its peer group -- and a distribution yield of 5.9%. That's a pretty decent price for a stock that has proven over the years to be a reliable income investment.
This 5% yield utility stock is about to give you a big dividend
Neha Chamaria (National Grid): National Grid's hefty 5% dividend yield is, of course, the key reason the stock has made it to this list today, but there's another big factor behind my recommendation: The utility stock could soon send a big special dividend your way.
The past few months have been important for National Grid on several accounts, with two events standing out: rate increases and an impending divestment. The Massachusetts Department of Public Utilities issued a rate order some months ago allowing an increase in electricity distribution rates after a gap of six years. The hike is expected to increase National Grid's revenue by $101 million annually. That number could get even bigger if the company's other pending rate increase proposals are approved.
Even more important for income investors is National Grid's agreement to sell 61% of its stake in its U.K. gas distribution unit by March 2017 for roughly $4.4 billion in cash and $2.3 billion in debt financing. Out of that amount, the company intends to return as much as $5 billion to shareholders in the form of a special dividend and share repurchases. That's a huge amount, and it could mean a hefty special dividend for investors in the next couple of months. (Note that National Grid reports numbers in GBP, so all numbers mentioned here have been converted to USD at a rate of 1GBP=1.24 USD.)
National Grid's dividend track record is already pretty impressive as almost 95% of its revenues come from regulated utilities. Moreover, the company follows a dividend policy of increasing its dividend at least in line with the U.K. RPI (Retail Price Index) to factor in inflation. That's another bonus for income investors. Overall, National Grid's dividend has stayed well above the 3.5% mark since 2008. Given the dividend growth potential and the stock's 20% drop in the past six months, this could be the perfect entry point for dividend lovers.