With the three-month treasury rate now over 4%, there's a real opportunity cost of investing in the stock market.
For any asset to be worth allocating your hard-earned savings toward, it needs to have a path toward producing a total return above 4%. Otherwise, it's not worth the risk.
One of the simplest ways of justifying an investment is if a stock's dividend yield is above the risk-free rate. At that point, the passive income will be able to keep up with the return of a Treasury bill, with the added potential upside (and downside) of the equity investment. Dominion Energy (D 1.10%), Enbridge (ENB 0.68%), and Kinder Morgan (KMI 0.27%) are three high-yield dividend stocks that all have a dividend yield above the risk-free rate. Here's why each company is worth considering in today's rising interest rate environment.
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Dominion Energy's dividend remains intact despite its business review
Daniel Foelber (Dominion Energy): Dominion Energy stock reached a 52-week low on Monday. The move lower seems to be largely a result of the company's third-quarter 2022 earnings and its announced business review. Dominion Energy has been struggling to find a new identity for itself after selling off much of its oil and gas business and diving headfirst into renewable energy mega projects. Yet the uncertain profitability of those projects and what Dominion's "regulated decarbonization" messaging entails for shareholders have been pressuring its stock price.
What's more, Dominion is coming off a dividend cut in 2020 when it reduced its quarterly dividend from $0.94 a share to $0.63 a share. It has since raised its quarterly dividend back to $0.668 per share. But the business review doesn't exactly reassure investors that the dividend is particularly secure. To its credit, Dominion did mention during its Q3 2022 earnings call that the business review wouldn't negatively impact the dividend. However, given that this is the company's second major strategy shift in two years, investors have every reason to take a wait-and-see approach.
What Dominion has going for it is an established, regulated eclectic utility business and long-term investments that are headed in the right direction. The potential for offshore wind in Dominion's backyard off the coast of Virginia is high. And Dominion is well positioned to take advantage of that opportunity. Down over 33% from its all-time high, Dominion Energy has been one of the worst-performing utility stocks, a sector that usually does well in a bear market given its steady cash flows. Dominion now has a dividend yield of 4.6%, which is sizable relative to its peers. Dominion's performance over the last few years has been disappointing. But given the sell-off, its attractive yield, and its growth in renewable energy, Dominion Energy stock could be worth considering now.
Fuel your passive-income generation with this diversified energy stock
Scott Levine (Enbridge): You don't have to be an energy industry expert, just someone who visits a gas station or heats a home with oil to know that energy prices have experienced extreme ups and downs in 2022. West Texas Intermediate crude oil, one of the oil benchmarks, traded for about $75 per barrel in January and soared to more than $120 per barrel in June. This volatility may shake the resolve of some investors, but those who have the fortitude to withstand the sharp upward and downward movements would be well served to consider Enbridge and its mouthwatering forward dividend yield of 6.4%.
While Enbridge has some renewable energy assets in its portfolio, the lion's share of the company's revenue comes from its midstream operations. According to management's forecast, for example, Enbridge's liquids-pipelines business will account for 58% of the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2022; moreover, gas distribution and gas transmission will contribute EBITDA of 12% and 26%, respectively.
High-yield dividend stocks are awfully alluring, but smart investors know that it's important to dig deep into the company's financials before picking up shares; a high-yield stock is desirable but not if the company is teetering on financial ruin. With regards to Enbridge, circumspect investors can rest assured that the company is in sound financial health. For instance, the company maintains an investment-grade balance sheet featuring BBB+ ratings from S&P Global and Fitch Ratings. Another example of the company's prudent approach to its financial well-being is the company's approach to its dividend. Management has targeted a payout ratio between 60% and 70%, allowing for the company to use its remaining capital to reinvest in the business regarding growth opportunities or the retirement of debt.
A high-yield stock with dividend-growth prospects
Lee Samaha (Kinder Morgan): While the excitement around renewable energy is understandable, it will be many years before the demand for gas trails off. Whether it's for producing liquified natural gas (LNG) or generating electricity, or for industrial, residential and commercial use, gas is still going to be a vital part of the energy mix. That's where Kinder Morgan, its 83 thousand miles of pipelines, and 143 terminals in North America come in.
The company is a major transporter of natural gas, renewable fuels, oil, carbon dioxide, and other products. As such, it's a play on the increased demand for gas and, indirectly, the future investment in gas and, to a lesser extent, oil. While that might concern investors, consider that Kinder Morgan's dividend is well covered by its free cash flow right now, and the 6.1% dividend yield means (ignoring inflation and assuming the dividend is maintained) in 16 years, investors will have received the value of the stock in dividends alone.
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Moreover, there will always be a demand for gas as renewable energy is intermittent and not feasible in many parts of the world for geographic or geopolitical reasons. Furthermore, Europe's intended phasing out of Russian energy assets opens up an opportunity for LNG export that's already boosting investment.
According to the CEO of process automation company Emerson Electric, Lal Karsanbhai, on the last earnings call, said LNG investment activity in Louisana and Texas (where Kinder Morgan has transportation networks) is "incredibly robust" with a "number of projects" made "vastly in response to the energy security of Europe." As such, Kinder Morgan could be able to pay hefty dividends for many years to come.
