Not every high-yield stock is worth owning, a fact that income-focused investors often learn the hard way, via a dividend cut, when they first start their investing journey. You have to balance a company's business, financial health, and prospects against the yield to decide if it is worth owning. More times than not, the math won't work out in favor of a buy. That said, three stocks that look like dividend buys today are Nucor (NUE -0.27%), Eaton (ETN -1.01%), and Enterprise Products Partners (EPD -1.86%). Here's what you need to know about these 3%-plus-yielding names.
1. Squeaking onto the 3% yield list
Of this trio, Nucor has the lowest yield at just 3%. That, however, is toward the high end of this giant U.S. steel mill's historical yield range. A yield near 4% would be a much better entry point (it's hit that level around four times in the past), but the current rate is at the very least a fair price.
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This is important, because Nucor isn't an ordinary steel mill. It happens to be the largest and most diversified steel company in North America, holding the No. 1 or 2 spot in 11 categories. It also has one of the strongest balance sheets in the industry, with low levels of debt and ample room to cover its interest expenses. In a highly cyclical industry like steel, taking a conservative approach while holding leading share in core end markets is a distinct advantage.
What's even more interesting, however, is the company's 46-year history of annual dividend increases. That shows a clear commitment to rewarding shareholders for sticking around. And while dividend hikes have been modest of late, lagging behind the rate of inflation growth, the company materially increased its dividend payment just as the deep 2007-2009 recession hit. That downturn led to a very long bear market for steel makers, during which some peers were forced to cut dividends. That, once again, shows how Nucor's financial strength and conservative approach help investors win. (Prior to the policy change, Nucor made frequent use of special dividends.)
Although it's not a screaming buy, investors should be watching Nucor closely. If you are interested in owning a good company at a fair price, it's worth buying today. If you are value focused, then keep this steel giant on your wish list for the next recession, when the stock price will likely drop along with demand even though Nucor has the wherewithal to survive and thrive in such weak spells.
2. A bit more yield
Next up is Eaton, a diversified industrial giant with a focus on helping customers make the most efficient use of energy. That's increasingly important as the world embraces energy conservation as a way to reduce the impact humans have on global temperatures. Eaton's business spans the electrical, aviation, vehicle, and hydraulic spaces and reaches around the world.
To put some numbers on that last point, North America is about 60% of sales; the rest comes largely from Latin America (6%), Europe (22%), and Asia (13%). Like Nucor, Eaton's business tends to be cyclical, but its broad diversification and energy-efficiency focus help offset the pain of downturns. (The last recession stung, but it didn't lead to red ink.)
The stock currently yields around 3.2%, not the highest level it's ever seen but still toward the high end of its historical range. Now add in modest leverage (debt is just a third of the capital structure) and the fact that Eaton covers its interest expenses 11 times over. Put simply, it's ready to take the next recession in stride, just like it handled the last one. The stock would likely fall in a recession, but if you want to own a good company at a fair price, Eaton is worth looking at right now.
What's really notable today is that Eaton has finally absorbed the 2012 acquisition of Cooper Industries, its biggest purchase ever. It is once again looking to make some moves with its portfolio, recently inking a partnership with Cummins and making plans to spin off its lighting business. It is a disciplined acquirer, however, so only smaller bolt-on deals have been inked so far. A recession might lead to more compelling opportunities that financially strong Eaton will be ready to take advantage of when the time is right.
NUE Dividend Per Share (Quarterly) data by YCharts.
One dividend issue of note here is that Eaton's disbursement has only been increased annually for 10 consecutive years. It paused hikes during the 2007-2009 economic downturn. That said, it has a long history of flat to higher payments. And when dividend hikes are being made, they tend to be generous: Over the past decade, that annualized increase was roughly 10%. So income investors should be very comfortable in the fact that Eaton places a high value on returning value to shareholders via dividends.
3. Doubling it up
Last up is Enterprise Products Partners and its nearly 6.2% yield, more than twice what Nucor is offering today. Unlike the other two companies above, Enterprise is a master limited partnership, a more complex structure that comes with some tax issues. But the higher yield is likely to be worth it for income-focused investors. That's doubly true here, since Enterprise is one of the largest and most diversified players in the North American midstream energy sector.
It owns the pipes, processing plants, ports, storage, and transportation facilities that help move oil and natural gas from where they get pulled out of the ground to where they finally get used. Its business, meanwhile, is backed by fee-based contracts, so often volatile oil prices aren't a big issue for the partnership. Moving energy products is an increasingly important role in the U.S. market, too, since infrastructure development has lagged behind oil and gas production growth in recent years. Enterprise is currently working on roughly $6 billion of growth projects to help satisfy that infrastructure demand.
NUE Dividend Yield (TTM) data by YCharts.
And there's much more to like here. For example, Enterprise has long been one of the most conservatively run players in the midstream space. Its debt-to-EBITDA ratio is among the lowest in the midstream sector. It also has one of the strongest distribution coverage ratios of its peers, at 1.7 times through the first half of 2019 (for reference, 1.2 times is usually considered pretty robust).
Basically, Enterprise is in a great position to support its capital investment program to take advantage of the increasingly important role the U.S. is playing in the global energy markets. At the same time, income investors will likely be rewarded by mid-single-digit distribution increases for the foreseeable future, just like they have been for the last 22 years. In addition, the yield is toward the high end of its range over the past decade.
Although Enterprise won't be exciting to own, if you want a healthy combination of yield and distribution growth, it is an industry leader worth adding to your portfolio today.
Good companies, good yields
The thread that connects Nucor, Eaton, and Enterprise is that they are all well run and financially strong. That's something for which investors should be willing to pay a premium. However, that doesn't seem to be the case today for any of these stocks. Nucor and Eaton are, at worst, fairly valued, using dividend yield as a rough guide to value, and Enterprise actually looks pretty compelling, historically speaking. Take some time to get to know these 3%-plus-yielding stocks, and you might find that one or more ends up in your portfolio.
