When you calculate long-term returns for a stock, do you factor in dividends? You probably should. The all-encompassing metric, called total return, tallies the stock price performance and the dividends or distributions returned to investors over a specific period of time. It can make a significant difference.
For instance, the 10-year return of the S&P 500 is 245%, but the total return of the index in that span is 326%. The difference between the two is equivalent to $8,100 -- on an initial investment of just $10,000.
Of course, dividends and distributions don't mean much if the underlying stock loses value. That's why it's important for income investors to prioritize buying great businesses. With that in mind, we asked three contributors at The Motley Fool for their best stocks with yields over 4%. Here's why they chose NextEra Energy Partners LP (NYSE:NEP), Brookfield Renewable Partners LP (NYSE:BEP), and AT&T (NYSE:T).
A fast-growing, high-yield renewable energy stock
Maxx Chatsko (NextEra Energy Partners LP): This renewable energy stock doesn't just pay a 4% dividend yield, it has also bested the total return of the S&P 500 since it debuted in 2014. That solid performance has been achieved by sticking to a responsible capital deployment strategy, not bingeing on debt, and an advantageous relationship with the largest renewable infrastructure developer in the United States.
NextEra Energy Partners is a master limited partnership (MLP) that acquires renewable energy projects across the United States, then sells the electricity generated in long-term contracts to local utilities. The business model provides predictable revenue, income, and cash flow that allow it to pay an above-average distribution yield and simultaneously plan its next big move.
Since the beginning of 2018, NextEra Energy Partners has acquired close to 2,000 megawatts of wind and solar projects from NextEra Energy Resources (NEER). The partnership's dance partner is the power generation subsidiary of NextEra Energy and the fourth-largest capital investor in the United States. It's also looking to exit 2020 with a nationwide renewable energy backlog of 40,000 megawatts.
The relationship with NEER provides a huge opportunity for NextEra Energy Partners to continue growing its portfolio for the long haul, which is expected to increase from 2,700 megawatts in early 2018 to 5,300 megawatts by the end of this year. It also gives management confidence in its ability to grow the distribution 12% per year through 2023, including a significant bump to $2.14 per unit by the end of this year. If the company delivers, then the distribution yield at the end of 2023 would be around 7% based on current prices. That's pretty difficult to beat, especially given the track record executing the growth strategy to date.
A top dividend growth stock for your portfolio
Neha Chamaria (Brookfield Renewable Partners): After a steep fall in the latter half of 2018, shares of Brookfield Renewable Partners have made a dramatic comeback this year, rising nearly 22% year to date as of this writing. Part of the optimism can be credited to the company's solid operational performance in fiscal 2018 backed by some big growth moves, including increasing its stake in TerraForm Power.
At the same time, stronger financials thanks to asset sales and an improved debt maturity profile have boosted management's confidence in its ability to reward shareholders richly in the long run. Brookfield Renewable believes it is well positioned to grow funds from operations per share at a compound annual rate of 8.5% between 2018 and 2022 to support annual dividend increases of at least 5%.
Given the massive potential in renewable energy, it's reasonable to expect Brookfield Renewable will deliver on its financial goals. The company is a pure renewable energy play with a solid footprint in hydropower. I believe growing industry demand, combined with its earnings and dividend growth potential, should not only support Brookfield Renewable's share price but also a dividend yield above 4% in the long run. In fact, that seems a pretty conservative estimate for a stock yielding nearly 6.6% currently.
In short, income investors hungry for high-dividend yields can't go wrong betting on Brookfield Renewable Partners as the company positions itself to exploit opportunities in a market estimated to be worth trillions of dollars.
A big yield with a huge opportunity
Chris Neiger (AT&T): AT&T, one of the largest wireless carriers in the U.S., not only pays a hefty 6.6% yield, but the company is also gearing up for its latest growth opportunity: 5G. Carriers are beginning to lay the groundwork for their 5G networks now, and the new cellular standard will bring faster connections and more devices online than ever before.
Not only that, but 5G will likely be very lucrative for AT&T and other carriers. Some estimates put the market size for new 5G services at $619 billion by 2026. That's because 5G will allow for entirely new types of services, like smart city sensors for water, electricity, and parking, as well as industrial automation. Managing fuel usage and energy with 5G-connected sensors could save an estimated $160 billion in energy costs. Consumers will benefit from 5G, too, as smartphone cellular connections will be up to 20 times faster on 5G than they are with 4G.
To benefit from this, AT&T says it'll have its 5G network up and running in 21 cities by the end of this year. It's already begun testing and rolling out preliminary services in some areas, and it'll ramp up its 5G network expansion in the coming months.
For investors looking for a top stock with a high yield -- and that's about to benefit from a massive new market opportunity -- AT&T deserves strong consideration.