On the surface, 2023 has been a good year for the stock market. But dig deeper and much of the S&P 500's gain can be attributed to the outperformance of a handful of big tech stocks.
Behind the scenes, many stocks have undergone steep sell-offs. In the past six months alone, United Parcel Service (UPS 0.14%) is down 18%, Brookfield Renewable Corporation (BEPC 0.09%) is down 31%, and NextEra Energy (NEE -1.36%) has lost 38% of its value. Here's why each of these dividend stocks is worth buying now.
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UPS is well placed to generate robust dividends for many years
Lee Samaha (UPS): A combination of slowing economic growth, a natural rebalancing of consumer spending toward services and away from physical goods as the pandemic recedes, and businesses running down inventory they built up during the pandemic has caused volume declines for UPS in 2023. Management has already lowered its revenue and earnings projections for the full year, and I think it could get worse before it gets better for UPS this year.
At the time of writing, the stock is down 11% on the year and 35% from its all-time high. That said, it's important to keep a long-term perspective when investing. Despite the disappointments in 2023, Wall Street analysts are still forecasting $6.5 billion in free cash flow (FCF) this year, which will easily cover UPS's dividend payout of around $5.2 billion.
Meanwhile, this will likely prove a trough year in UPS's fortunes, as the cyclical factors mentioned above will hopefully start to correct in 2024. In addition, UPS continues to transform its business by growing its small and medium-sized business (SMB) and healthcare-based revenue while investing in productivity-enhancing automation and smart facilities.
It's tough to predict the exact bottom in UPS's stock price, but you can pick an entry point based on valuation, and UPS looks like a good value now for income-seeking investors.
Brookfield Renewable is a green energy powerhouse that offers a high-yield dividend.
Scott Levine (Brookfield Renewable): For clean energy investors who count Brookfield Renewable among their holdings, the past year has been painful. While the S&P 500 has soared 19%, shares of Brookfield Renewable have plunged more than 30%. Disconcerting as this may be, investors shouldn't lose hope. The green energy powerhouse, along with its 6.4% forward-yielding dividend, remains a leading pick for those bullish on the growth of renewable energy. The stock's recent tumble isn't actually a red flag -- investors should see green and pick up shares, especially when they're hanging on the sale rack.
With an expansive global presence, Brookfield Renewable operates a portfolio of clean energy assets -- including solar, wind, and energy storage -- with capacity of 32 gigawatts (GW). And the company is well-positioned to grow significantly in the coming years, as its development pipeline includes projects totaling 132 GW.
Income investors will surely be attracted to Brookfield Renewable's high-yield dividend, but experienced investors unfamiliar with the company may be wary of the large payout, which at this level can be a red flag. However, skeptics can rest assured that management is taking a financially responsible approach to the dividend. Over the past 10 years, Brookfield Renewable has increased its funds from operation at a compound annual growth rate (CAGR) of 10% while raising its distribution at a 6% CAGR during the same time period. Looking ahead, management targets raising the distribution at 5% to 9% annually.
Currently, investors can scoop up Brookfield Renewable for only 5.6 times trailing earnings -- a notable discount to the 24.7 multiple of the S&P 500.
NextEra Energy stock has fallen far enough
Daniel Foelber (NextEra Energy): NextEra Energy stock reached a new 52-week low on Thursday and is now down over 38% in the past six months. Investors aren't used to seeing the former market-darling utility stock undergo a steep sell-off. But at least some of the sell-off seems warranted.
NextEra's subsidiary NextEra Energy Partners (NEP -0.89%) slashed its dividend growth rate from a range of 12% to 15% per year to 5% to 8% per year through at least 2026. The news sparked a swift and brutal sell-off in both NextEra Energy and NextEra Energy Partners.
In the 15-year period from Jan. 1, 2007 to Dec. 31, 2021, NextEra Energy stock gained 586% -- which is almost unheard of for a regulated electric utility. It posted that epic gain largely by being an early adopter of the energy transition, namely by converting its mostly coal and natural gas portfolio toward renewable energy.
NextEra took advantage of low interest rates and built massive utility-scale renewable energy projects. These projects are capital-intensive and take time to pay off. But if executed well, they can provide a reliable source of cash flow thanks to power purchase agreements.
The issue is that this business model is becoming harder to justify now that the cost of capital has gone up. NextEra's expansion was impressive, but it wasn't free. The company's total net long-term debt position has nearly doubled in the past five years. Its interest expense over the past 12 months was more than $2.2 billion. For context, it paid $3.56 billion in dividends over the last 12 months.
Data source: YCharts
Given the higher cost of capital and NextEra's sizable interest expense relative to its dividend, it makes sense that the company's subsidiary is going to slow the rate of dividend increases. The good news is that NextEra is way ahead of its peers in the energy transition. So it wouldn't be surprising to see the company pull back on its aggressive growth strategy in an effort to shore up the balance sheet
NextEra Energy did an excellent job operating in the low-interest-rate business climate. It should still pursue its carbon reduction targets, just in a more measured way. If it can do that, then the stock would be a steal at its current valuation. However, it would certainly be reasonable for investors to wait and see how management plans to pivot -- if at all -- given the company will be a far riskier investment if NextEra barrels ahead like nothing has changed.
