Over the past half-decade, income investors have flocked to blue-chip dividend stocks, looking to lock in a dependable paycheck during a time of historically low interest rates that sent bond yields plummeting. And while interest rates have crept up a lot, many of the best-known dividend stocks still pay relatively low yields and trade at high valuations that could lead to years of below-average returns.
But there are still plenty of great dividend stocks paying a solid yield, and with better prospects to grow their payouts than most of the tried-and-true names out there. You just have to be willing to turn over rocks to find companies you may not have known even existed.
To make it a little easier for you, three Motley Fool contributors identified Terraform Power Inc. (NASDAQ:TERP), Dover Corp. (NYSE:DOV), and Tallgrass Energy LP (NYSE:TGE) as ideal under-the-radar dividend stocks with the prospects to deliver amazing returns. Chances are, you could ask 100 people about these three companies, and you'd only get a handful of people who've heard of them -- outside a bunch of stock jockeys like us, that is.
Keep reading to learn what makes these three unknowns worth owning in your dividend stock portfolio.
The best high-yield dividend growth stock you've never heard of
Jason Hall (Terraform Power): Terraform Power isn't exactly a household name. The company, which owns and runs renewable energy-producing assets around the world, operates almost completely in the background; chances are the vast majority of the people and companies that benefit from the clean renewable power it produces have no idea it even exists.
But dividend investors should get to know the company, which has undergone a remarkable transformation over the past year.
After Brookfield Asset Management took it over in 2017, actions its new management put in place to cut expenses and improve returns are paying off. Last quarter, power generated spiked 46% as its acquisition of Saeta boosted its capacity substantially. This new production, improvements in its operating structure, and actions to boost production from its other facilities helped Terraform Power grow CAFD -- cash available for distribution, a key metric for yieldcos -- over 66% on a per-share basis.
And there's more cost-cutting and output-growing ahead, too. Management said its new service agreement with General Electric would further drive down its operating costs over the coming quarters, while efforts to buy out minority partners from some of its projects and opportunistic investments in markets such as Spain should push per-share returns and cash flows even higher.
With a yield of almost 6.9% at recent prices and prospects to grow the payout for decades, little-known Terraform Power could be the best dividend stock you've never heard of.
An unparalleled streak of rising dividend income
Dan Caplinger (Dover): Sometimes, the best investments come from areas of the market that typically don't get much attention. Dover is a great example, as the industrial conglomerate focuses on little-followed areas such as fluids, engineered systems, and refrigeration and food equipment. Dover's fluid-handling business serves applications such as fuel pumps and vehicle washing systems, while engineered systems run the gamut from solid waste handling and product assembly tools to digital printing and inventory tracking.
At first glance, Dover's 2.3% dividend yield doesn't seem to stand out from the crowd. But what's particularly impressive about Dover is that it's managed to put together one of the longest streaks of dividend growth of any stock in the market. For 63 years, Dover has delivered annual dividend increases, including its most recent boost in August to $0.48 per share every quarter. The 2% rise is an example of the relatively modest increases the company often makes, but being able to expect more income year in and year out has value.
Dover's a timely investment right now because of its current restructuring plans. The conglomerate hopes to refocus its efforts on its most promising businesses, and it hopes to cut overhead expenses by roughly $130 million per year to free up cash for growth initiatives. As plans develop, investors are hopeful that Dover can keep delivering dividend growth while seeing its stock keep moving higher as well.
13 and counting
Matt DiLallo (Tallgrass Energy): Few investors have probably heard about pipeline company Tallgrass Energy, which means most are missing out on its amazing dividend. At a nearly 9% yield, it's one of the most attractive payouts in the sector, especially when factoring in its growth potential.
When dividend yields approach double digits, it's usually a sign of trouble. However, that couldn't be further from the case at Tallgrass Energy. For starters, the company currently generates enough cash flow to cover its dividend by a comfortable 1.28 times, well above the 1.2 average of most pipeline companies. Furthermore, the company's cash flow is very stable, since 98% comes from predictable fee-based contracts. Finally, it has a solid balance sheet with a conservative leverage ratio.
Tallgrass Energy uses its retained cash flow and balance sheet flexibility to invest in building and buying additional midstream assets. Those expansions have enabled the company to increase its payout in each quarter since it came public in 2015; it recently notched its 13th consecutive quarterly dividend increase. Meanwhile, the company has plenty of expansion potential in the pipeline, including two needle-moving oil-related infrastructure investments, that could give it the fuel to continue increasing its dividend for years to come.
With a rock-solid high current yield and a large pipeline of expansion opportunities that could fuel additional dividend growth, Tallgrass Energy is one dividend stock that income-seeking investors won't want to miss.
Dan Caplinger has no position in any of the stocks mentioned. Jason Hall owns shares of TerraForm Power and has the following options: long January 2019 $15 calls on General Electric. Matthew DiLallo owns shares of General Electric and TerraForm Power. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.