Dividend stocks can be a great way to make some passive income. The higher a stock's dividend yield, the more income the investment can produce.
While investors still need to be cautious when buying higher-yielding dividend stocks because they can be at a higher risk of a dividend reduction, there are several excellent options. Three high-quality high-yield stocks that our contributors don't want you to overlook are 3M (MMM 0.11%), Delek Logistics Partners (DKL 0.37%), and NextEra Energy Partners (NEP -0.84%). Here's why these high-yield stocks stand out from the pack.
A troubling opportunity
Reuben Gregg Brewer (3M): In the first quarter of 2022, diversified industrial giant 3M spent $0.13 per share dealing with ongoing lawsuits and another $0.26 to address ongoing environmental issues. Those two costs represent roughly 15% of the company's newly formulated adjusted earnings. That adjusted earnings revamp was made to help show investors the expense of these ongoing issues.
The costs associated with these two headwinds aren't going away anytime soon, and that's bad. However, given that the company still earned $2.26 per share after paying those costs, it looks like 3M can handle the expense. On top of the dollars and cents of the issue, the company also has an investment-grade rated balance sheet and a huge $70 billion market cap. It would be nice if these were the only problems.
MMM Dividend Yield data by YCharts
Management has also been working to move earnings growth into a higher gear. That will likely come from its long commitment to research and development, an inherently unpredictable and lumpy affair. All in, there's a lot of reason to dislike 3M today, which is why its 4.5% dividend yield is historically high right now.
But given the company's long history of success, and more than 60 years of annual dividend increases (it's a Dividend King), long-term investors should see this as an opportunity to jump aboard a fallen angel. If history is any guide, time will eventually heal these wounds. And if you can stomach a little uncertainty, you can collect a fat dividend while you await better days.
Steady growth with the fuel to keep rising
Matt DiLallo (Delek Logistics Partners): Delek Logistics Partners is a relatively unknown master limited partnership (MLP), overshadowed by its larger rivals. Its relatively small size has caused investors to miss out on its incredible consistency. The MLP has increased its distribution every quarter since its formation in 2012. The streak is now up to 37 straight quarters. That's impressive considering that many other MLPs have had to slash their payouts during that period, which has been a turbulent time in the oil and gas market.
A key driver of Delek's success is its strategic relationship with refiner Delek US (DK -1.99%). The refiner has steadily dropped down most of its logistics assets to its MLP, giving it a growing cash flow stream to support a rising distribution. Delek Logistics has also maintained a conservative financial profile, giving it the flexibility to make acquisitions and invest in expansion projects.
The company recently made a large-scale acquisition from a third party, acquiring 3Bear Energy for $624.7 million. The deal will diversify its revenue streams while growing its cash flow. That acquisition increases Delek Logistics' confidence that it can increase its payout by another 5% this year.
The MLP still has plenty of financial flexibility to make additional acquisitions. Meanwhile, Delek US has some remaining logistics assets that it can drop down to its MLP. Add in the potential for more third-party deals, and the company should have the fuel to continue growing its distribution -- which yields an attractive 8.4% -- for years to come.
These dividends could make you a lot of money
Neha Chamaria (NextEra Energy Partners): When it comes to renewable energy stocks, chances are you've heard about NextEra Energy but not so much about NextEra Energy Partners. The latter, however, is a dividend powerhouse that aims to grow its dividends at such a high pace that you'd regret overlooking the stock.
To start, NextEra Energy Partners has increased dividends every year since it went public in 2014. That doesn't sound too impressive until you know that the company doesn't follow the herd in raising dividends annually -- it has increased dividends every quarter since 2014. Thanks to those dividends, patient shareholders have reaped rich returns over time. The best part is that investors who get into NextEra Energy Partners now could reap equally big returns in the coming years.
That's because NextEra Energy Partners is targeting 12% to 15% growth in annual dividends through 2025. Here's what that means: If you buy 1,000 shares in the clean energy company now, you could earn at least around $3,170 in passive income this year. By 2025, you could be collecting as much $4,950 in annual dividend income on the same number of shares.
That dividend growth goal is attainable simply because NextEra Energy Partners is backed by sponsor NextEra Energy. It should therefore never face a shortage of contracted clean energy assets to buy and operate to generate steady cash flows to support stable and large dividends. Its sponsor is, after all, the world's largest producer of wind and solar energy and is pumping billions of dollars into growth projects.
A potential double-digit percentage growth in dividends from a stock already yielding 4.2% certainly makes NextEra Energy Partners an attractive income stock you'll want to pay attention to right away.
