You can secure a 5% dividend yield without being too risky or aggressive. Sometimes, it's a matter of jumping on a good opportunity when it arises. A stock can fall in value for various reasons, including a general bear market, and that pushes its yield up. As long as the underlying business is safe and there is nothing wrong with the company's fundamentals, that can be a good way to snap up a high-yielding stock without taking on a big risk.
Viatris (VTRS -1.32%) and Enbridge (ENB -1.78%) are two stocks with high yields that look fairly safe right now. Here's why either one could be good a buy for income investors.
1. Viatris
Viatris makes branded and generic drugs, including the cholesterol medicine Lipitor. The company was formed in 2020 when healthcare giant Pfizer spun off its slow-growing Upjohn division, and merged it with Netherlands-based Mylan, another generic and specialty pharmaceuticals company. Not only did Viatris' business not grow last year, but sales of $16.3 billion were also down 9% from the previous year. Viatris also sold off its biosimilars business for $3.3 billion last year.
That's not a move that might attract growth investors, but it does strengthen the company's balance sheet and help it reduce debt -- which is a key reason it trades at just 5 times its trailing revenue. Investors are worried about its long-term debt, which is more than $18 billion.
But Viatris has been working on paying down its debt. In the first three months of 2023, the company paid down $546 million worth of debt. And since the start of 2021, it has reduced its debt by $6 billion. Viatris generated free cash flow of $923 million last quarter, which gave it room to pay down debt while also paying its dividend (which costs the company about $144 million every quarter).
Viatris' strong free cash flow makes its 5.2% dividend yield look pretty safe right now. The company's payout is well above the S&P 500 average yield of 1.7%.
This year, Viatris projects revenue to be around $15.8 billion at the midpoint. In the longer run, the company hopes the launch of a new eye care division will help lead to better growth opportunities.
2. Enbridge
Enbridge has an even higher dividend yield at 7.0%. Investors have been bearish on oil and gas stocks with commodity prices falling this year. As a result, Enbridge's stock is currently trading within a few dollars of its 52-week low.
But at an astronomical payout ratio of nearly 300%, income investors might be tempted to steer clear of the stock. However, Enbridge evaluates its business and the safety of its dividend based on distributable cash flow (DCF), which is an adjusted calculation that excludes items such as interest expense, taxes, and maintenance capital.
For the three-month period ending March 31, the company's DCF was 3.2 billion Canadian dollars. Given that the company pays out around CA$1.9 billion in dividends each quarter, that would put its payout ratio in terms of DCF at less than 60% -- not nearly as scary as the payout ratio that's based on net income, which includes many non-cash expenses.
The company's DCF for the first quarter of 2023 was up 3.5% from the prior-year period and Enbridge shows no signs of concern. CEO Greg Ebel said that the company's "low-risk business model continues to deliver in all market cycles." Enbridge relies on long-term contracts, which give the pipeline company lots of stability.
Enbridge has been a solid dividend growth stock to own, increasing its payout for 28 consecutive years. And with the business still generating strong financials, there's little reason to doubt that streak will end anytime soon. Now may be an optimal time to add this underrated stock to your portfolio.