Please ensure Javascript is enabled for purposes of website accessibility

These 4 Dividend Stocks Yield Over 5%. Here's Why I Bought Them

By Jason Hall - Oct 17, 2017 at 8:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One telecom and three energy stocks are my highest-yield investments. You might be surprised to learn why I own them.

Over the past several years, I've become more interested in dividend stocks -- more specifically, stocks that both pay a strong yield and have solid prospects for increasing their payouts. High-yield dividend growth stocks, if you will. 

Over that time, I've bought shares of beaten-up telecom giant Centurylink Inc (LUMN -2.94%), integrated oil and gas giant Royal Dutch Shell plc (ADR) (RDS.B), energy midstream leader ONEOK, Inc. (OKE -1.12%), and utility-scale solar farm owner 8Point3 Energy Partners LP (CAFD). All of these companies still pay dividends yielding over 5% at recent prices. 

Two hands, one holding a percent sign and the other holding a dollar sign.

Image source: Getty Images.

Keep reading to learn why I invested in each of these companies, and what I expect from them going forward. 

The one that could backfire

When I first bought shares of Centurylink in April of this year -- and added to this position in May -- my expectation was that the company would be able to ride out the lean times and come through its merger with Level 3 Communications (LVLT) strong enough to maintain the dividend and still invest in growing the business. 

A hand reaches for a stack of cash in a rat trap.

Image source: Getty Images.

But since I bought shares, the market hasn't been so optimistic. Shares are down more than 20% since I first bought, as the market has become more concerned over the risk of a dividend cut. Centurylink's cash flow is far short of supporting its dividend, and there are very real concerns that the cost savings and cash-flow boosting Level 3 merger won't be enough to make up the difference. 

Why am I holding? Frankly, it's because the thesis hasn't really changed; mister market has just gotten the jitters. I invested in the prospects of a very fat yield but always acknowledged the risk of a dividend cut if the merger doesn't deliver as promised. If it doesn't work out, I'm prepared to see the stock price fall even more -- and take my lumps (and losses) if it does. 

Big oil, bigger yield

Royal Dutch Shell is another company I opened a position in just this year, having acquired shares in March. But while my Centurylink investment has lost 20% of its value, Shell's share price is up almost 12%. This is because the company's efforts to refocus its business on natural gas -- the segment of the oil and gas sector it sees as having the best long-term prospects -- are starting to pay off. 

In early 2016, Shell acquired BG Group, significantly adding to its natural gas exposure, including LNG production and export assets. Over the past two years, management has offloaded much of the company's non-core assets while investing in its new focus. It's still early, but we're already seeing the positive results of those investments:

RDS.B EPS Diluted (TTM) Chart

RDS.B EPS Diluted (TTM) data by YCharts.

Earnings and cash flow have started to bounce back in a very big way, as the company concentrates its investments in growing its newly refocused business. The balance sheet is also starting to improve, with cash up to $23 billion and the debt balance down slightly. 

This bodes well for Shell's dividend being maintained. It may be some time before a meaningful increase, since paying down the debt with excess cash should probably be a bigger priority for now. With a yield above 6%, I'm happy to get paid to wait. 

When being the middleman pays off

ONEOK is one of my favorite investments in the oil and gas industry, and it's the one company of this group that I've owned the longest (since 2015, with additional buys in 2016). The company serves a critically important role, connecting primarily natural gas and natural gas liquids (things like butane, propane, and others) producers to the grid so they can get their products to market. 

Pipelines going to a refinery.

Image source: Getty Images.

ONEOK not only fits a major need for producers in the markets it serves, but it has also built a business that insulates it from the worst of the ups and downs of commodity prices, with a business model that's based on a "take or pay" fee for access to its pipelines and gathering systems. This move may limit the upside if natural gas or NGL prices go higher, but it has also helped the company avoid taking a bath when prices fall off a cliff. 

Through a combination of being connected to some of the best growth plays in North America and some major benefits from acquiring its master limited partnership ONEOK Partners earlier this year, ONEOK's dividend is not only secure -- it's also set to grow significantly

The future of energy

As much as I'm counting on ONEOK and Shell to help generate income and growth, over the long term, I expect investments in stocks like 8Point3 Energy Partners to play a much bigger role in my portfolio. That's why I first bought shares in March and April of this year. 

Utility-scale solar farm with wind turbines in the distance.

Image source: Getty Images.

There is a growing body of evidence that renewables like solar and wind, when connected to energy storage, are on track to become far cheaper than oil and gas. This could happen far sooner than most people -- both inside and outside the energy industry -- expect. 8Point3 is an excellent income growth investment, as the partnership owns large-scale solar projects and sells the energy produced by them on long-term contracts to utilities, companies, and even individual consumers. 

This makes for a low-risk investment that generates incredibly predictable cash flow, offers significant resistance to recession, and even has built-in price escalations to deal with inflation. With a yield of almost 7% at recent prices and an average contract approaching 20 years in length, 8Point3 Energy Partners is worth a close look for most investors, whether you believe in a future that's dominated by renewables or not. 

If solar's role in powering the U.S. and the world does indeed accelerate over the next decade, providers like 8Point3 will almost certainly play a big role. I intend to be invested in that potential. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

8point3 Energy Partners LP Stock Quote
8point3 Energy Partners LP
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
Level 3 Communications, Inc. Stock Quote
Level 3 Communications, Inc.
Lumen Technologies Stock Quote
Lumen Technologies
$10.91 (-2.94%) $0.33
ONEOK, Inc. Stock Quote
$55.50 (-1.12%) $0.63

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.