Dividends are great wealth builders. That's evident from the data as companies that consistently increase their dividends tend to routinely beat the market. While that suggests investors should focus less on a stock's dividend yield and more on its growth prospects, sometimes you can have your proverbial cake and eat it too.
That's clear in the list of stocks our contributors came up with when we asked them for their top dividend stock to buy this October. In selecting Brookfield Infrastructure (BIP -1.33%) (BIPC -0.47%), Enbridge (ENB 1.68%), and 3M (MMM -0.66%), they highlighted stocks that offer yields well above average, with compelling upside potential. Because of that, these stocks could produce big-time total returns for long-term investors who buy them this month.
Image source: Getty Images.
Fitting the mold
Daniel Foelber (Enbridge): Canadian oil and gas infrastructure giant Enbridge embodies many of the qualities that make a great dividend stock. To begin, its free cash flow (FCF) is almost entirely fee-based or regulated, resulting in consistent numbers despite the market cycle. For example, Enbridge reported strong second-quarter results, earning $1.21 Canadian dollars ($0.90) in distributable cash flow (DCF) per share for the quarter. It expects to earn CA$4.50 to CA$4.80 ($3.36 to $3.59) DCF per share for the year, close to the CA$4.50 ($3.36) it earned last year. Even at the low end of the its target, Enbridge's DCF would be significantly higher than its annual dividend payment of $2.48. Enbridge's stable FCF is all the more impressive given the challenging 2020 oil and gas business climate.
Enbridge's predictable FCF forms the basis for its stable and growing dividend payment. The company has increased its dividend for the last 25 years at an 11% compound annual growth rate. It currently yields an astounding 8.3%, which is the highest it's been over the past 25 years.
ENB Dividend Yield data by YCharts
Enbridge shares are down 25% for the year, part of an ongoing sell-off that has resulted in the company heavily underperforming the market over the past decade. So far this year, the company's business model has been put to the test and passed, paving the way for investors to take advantage of a proven dividend stock at a discount.
It's a relative thing
Reuben Gregg Brewer (3M): Investors looking for a big income payer probably won't be too impressed with industrial giant 3M's roughly 3.7% dividend yield. However, that's higher than the S&P 500 Index's 1.9%, the industrial sector's 1.8% (using Vanguard Industrials Index ETF as a proxy), and, most important, it's toward the high end of 3M's historical yield range. In other words, on a relative basis, 3M's yield is pretty attractive today, which suggests that its valuation is relatively cheap.
MMM Dividend Yield data by YCharts
That's a potential opportunity for long-term investors willing to step in while others are afraid. That said, overall, 3M is holding up fairly well to the stresses of a global pandemic and recession. The company's sales were down around 12% year over year in the second quarter, but it remained solidly profitable. In fact, its worst-performing division (healthcare) had a 16.8% operating margin -- not bad for a cyclical industrial stock during an economic weak spot.
Adding to the allure here is the fact that 3M has boosted its dividend annually for more than six decades. That places it in a rarified group of companies known as Dividend Aristocrats. The fly in the ointment, because no stock is perfect, is that 3M is dealing with a pair of potentially large lawsuits. But with a $90 billion market cap and a modest financial debt-to-equity ratio of around 0.25 times, the company should be able to handle these issues in stride. All in, 3M looks like a pretty good buy today for dividend investors.
Supercharged earnings growth ahead
Matt DiLallo (Brookfield Infrastructure): Despite all the economic turbulence this year, Brookfield Infrastructure expects its 2020 results to be slightly ahead of last year's. Driving that stability amid the storm is the overall durability of its business model and the positive impact of its organic expansion and capital recycling program. Thanks to that resiliency and its strong balance sheet, its 4%-yielding dividend is on rock-solid ground.
However, as attractive as that payout might be, what stands out about Brookfield is its total return potential. While the company doesn't expect too much growth this year, it anticipates that its earnings will surge in 2021. Powering that forecast is its view that its 2020 headwinds will fade and that it will continue benefiting from its dual growth drivers.
Overall, Brookfield sees a more than 15% earnings uplift next year as it rides the tailwind of a reversal of foreign exchange headwinds and COVID-19 volume curtailments, while also benefiting from the full year of its long-delayed Indian telecom tower acquisition. On top of that, organic growth initiatives should add another 6% to 9% to its bottom line in the coming year. Finally, the company should be able to complete additional high-return acquisitions, which could add another net 1% to 5% to its bottom line after adjusting for expected asset sales.
That forecast suggests Brookfield has plenty of power to grow its dividend by another 5% to 9% next year. On top of that, it should have the fuel to continue generating market-beating total returns, making it a great dividend stock to buy this month.
