While the focal point with dividend stocks tends to revolve around the income these stocks generate, how the stocks generate that income can be just as important. It can also be quite different, depending on the company.
For conservative types, an energy investment like Enterprise Products Partners (EPD +1.33%) will provide a high yield and reliability that helps the investor sleep well at night. For growth and income-minded investors, The Southern Company (SO 0.14%) is about to complete a big investment project that could allow for dividend growth to increase. And for turnaround types, Stanley Black & Decker (SWK 0.57%) is struggling but doing what's needed to get back on track.
Here's a quick look at each.
1. Enterprise Products Partners: The tortoise
Master limited partnership (MLP) Enterprise Products Partners has a huge 7.6% distribution yield. If you are trying to maximize the income your portfolio generates, that should be a fairly attractive figure. But there's more good news here, including the fact that the distribution has been increased annually for 24 consecutive years.
NYSE: EPD
Key Data Points
That's important because Enterprise operates in the oil and natural gas industry, which is typically known for volatility. Only Enterprise operates in the midstream space, owning vital infrastructure assets like pipelines. Its cash flows are largely driven by fees, not energy prices, making it a very reliable income stock.
That reliable income contributes to an investment-grade-rated balance sheet and its distributable cash flow covered its distribution by 1.8 times in the first quarter of 2023. The big downside here is that the fat yield is likely to represent most of your return, given that growth opportunities in the midstream sector aren't huge (slow and steady is the target). But if maximizing income is your goal, Enterprise should be on your shortlist.
2. The Southern Company: A new dividend direction
The Southern Company is one of the largest regulated utilities in the United States. It operates in largely southern markets that generally have fairly attractive attributes, like growing populations and constructive regulator relationships. The company has been building a pair of nuclear reactors, collectively known as the Vogtle project, which, when completed, will provide it with decades of low-carbon energy. But the construction process has not gone smoothly, with cost overruns and delays. That's been an overhang on the stock and its ability to reward investors with dividend growth.
NYSE: SO
Key Data Points
Vogtle is set to be completed either late in 2023 or early 2024. At that point Southern expects to start generating cash from the plants while seeing a reduction in its capital spending, leading to an increase in cash flow of around $700 million a year. Some of that money is likely to go toward debt reduction, some toward further capital investments, and some toward dividends.
Over the past decade, Southern's dividend growth has averaged around 3%, but Vogtle has been a drag over that entire time span. It isn't unreasonable to think that this generally boring utility could see dividend growth pick up into the mid-single digits once it moves past this big construction project. The yield today is around 3.7%, which isn't huge but would be a lot more interesting if it was coupled with a higher dividend growth rate.
3. Stanley Black & Decker: Darkest before the dawn
Stanley Black & Decker, which is an industrial company that makes tools, is going to be an acquired taste. This Dividend King has a historically high yield at 3.7%, suggesting that the stock is on sale today. But there's a pretty good reason for the low stock price, given that the company's earnings were cut in half in 2022 and are headed lower again in 2023.
NYSE: SWK
Key Data Points
But management isn't sticking its head in the sand, it knows there are problems and it is working hard to address them. For starters, it has been reducing leverage built up from a series of acquisitions. It has also been working to integrate those purchases, including rationalizing both its operations and the products it offers (eliminating weak products and redundant ones).
At the same time, it is still focusing heavily on innovation so it remains a leader in the industries it serves. That's a lot and the near-term picture isn't going to be pretty, but this appears to be a case of ripping the Band-Aid off all at once. That should set the company up for a return to historical form, noting that you don't raise a dividend annually for 50-plus years without going through some rough patches. Contrarian investors will probably find historically high-yielding Stanley Black & Decker attractive.
One of these stocks should fit your dividend needs
There's no perfect dividend stock for every investor. Some investors will like the high-yield and boring business of Enterprise. Others will prefer the chance for higher dividend growth from Southern. And a select few will like the turnaround appeal of Stanley Black & Decker, a company that looks very much like a fallen angel right now.
