So you're looking for a great dividend stock. Fantastic! There are dozens -- maybe even hundreds -- all around the stock market; finding one oughtta be easy as pie!
Oh, you want a great dividend stock that yields more than 4%, you say. Now, those are a bit harder to come by. A lot of reliable dividend payers -- the Coca-Colas, Procter & Gambles, and Johnson & Johnsons of this world -- only yield between 2% and 3%. And some stocks with higher yields may not be particularly reliable.
Good news, though: Three companies that offer a combination of reliable payout coupled with high yield are Canadian telecom BCE (BCE 1.72%), pipeline operator Magellan Midstream Partners (MMP 1.83%), and oil major Royal Dutch Shell (RDS.A) (RDS.B). Here's why dividend investors should love these three top yielders.
A stock that's heading north
BCE, formerly known as Bell Canada Enterprises, is a major telecom in our neighbor to the north. Better yet, it pays a major dividend, currently yielding 5%. The company has been increasing its dividend every year since 2009, with fluctuating exchange rates sometimes benefiting and sometimes hurting U.S. shareholders.
The company's revenue, net income, and free cash flow have grown along with its dividend, and things aren't showing any signs of slowing. In the most recent quarter, third quarter 2019, all of the company's segments, including wireless telecom, wired telecom, and media, saw growth. Better yet, even though revenue only improved by 1.8%, net earnings increased 6.3% thanks in part to cost cutting. The real star of the show, though, was free cash flow, which was up 17.3% year over year. That should give investors confidence that BCE is going to have no trouble funding its dividend.
If there's one drawback to BCE right now, it's that its valuation is near a 10-year high at 19.1 times earnings. However, that's middle-of-the-road for the telecom industry as a whole. Dividend investors shouldn't fear buying into this reliable high yielder.
A stock that's headed south
Midstream pipeline operator Magellan Midstream Partners doesn't technically offer "shares of stock." As a master limited partnership (MLP), it offers "units." And those units don't pay "dividends," but "distributions." Other than the difference in names, though, and some increased reporting requirements at taxtime, Magellan functions pretty much the same as any other stock...and boasts an impressive 6.3% current yield.
However, the market has soured a bit on Magellan in the past half decade, despite the company's continuous distribution increases during that time. Its unit price has fallen by 17.9% over the past five years. That's not only pushed the yield to an all-time high, but has also pushed the company's valuation metrics -- including price-to-earnings and enterprise value-to-EBITDA -- to 10-year lows for much of 2019. New competition in some of the company's markets, especially the red-hot Permian Basin, may be partially to blame.
Meanwhile, Magellan is not only generating plenty of cash to fund its distribution, with a coverage ratio of more than 1.3, but has been adding new growth projects, including expanding the capacity of the Saddlehorn pipeline and the Seabrook Logistics terminal through two joint ventures. While that may not result in the blockbuster distribution growth of the past decade, it should ensure the MLP can continue to fund its generous payout for years to come.
A stock that's headed sideways
Over the last 10 years, shares of oil major Royal Dutch Shell have waxed and waned, and are now worth about 5% less than they were 10 years ago. That's unusual, considering how adept Shell's management has been at steering the company through the oil price downturn of 2014 to 2017, and how impressive its current yield is today. The company's best-in-class yield of 6.4% is backed up by a massive global oil and gas operation and a history of reliability.
During the downturn, as many smaller energy companies were slashing their dividends, Shell maintained its payout. Unlike some of its peers, it didn't increase its dividend, but considering how high its yield was and is, it's still a solid dividend stock. In recent quarters, Shell has relied on its lucrative downstream (refining and marketing) operations to contribute plenty of cash to its coffers, and was even able to outperform as oil prices fell in first quarter 2019 thanks to its major investments in natural gas.
Shell has also streamlined its operations to ensure it can wring profits out of oil production, even when the price of oil is less than $50/barrel. It hopes to lower that number even further. Considering that today, Brent Crude is trading above $60/barrel, Shell looks particularly compelling. Its history of reliable payouts should give dividend investors confidence that their investments here are well placed.
Outperformance in all directions
Historically, dividend stocks have outperformed their non-dividend-paying peers, and high yields can make a big difference to long-term performance. Luckily, BCE, Magellan, and Shell combine high yields with reliable payouts, making them excellent choices for dividend-focused investors and general investors alike.