Passive-income investors have many choices in today's market. The 10-year Treasury rate has fallen from 5% a month ago to around 4.4%, but that is still higher that what investors were used to over the past 15 years.
Meanwhile, many high-yield savings accounts yield more than 4%, and investors can even get passive income for cash held in their investment accounts. Interactive Brokers offers as much as 4.83% interest on cash balances, and Robinhood Markets just announced a 5% annual percentage yield on uninvested cash for Robinhood Gold members.
However, investors willing to take on more risk could benefit from investing in high-yield dividend stocks as a way to participate in the market while also collecting income. You can expect more than $500 in dividend income -- an annual yield equivalent of about 5.5% -- from $3,000 divided into equal parts among Devon Energy (DVN 0.09%), Brookfield Renewable (BEPC +0.00%) (BEP 0.13%), and Kinder Morgan (KMI +0.64%) during the next three years.
The actual amount will depend on Devon Energy, which has a variable dividend based on the performance of its business (more on that later). Here's why these three Motley Fool contributors think the stocks are worth considering now.
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Devon Energy's dividend is on the increase
Lee Samaha (Devon Energy): This oil and gas exploration and production company's payout consists of a fixed dividend (currently $0.20 a quarter) and a variable dividend whose value depends on its free-cash-flow generation. Having reached a high of $1.37 per share in the third quarter of 2022, the variable dividend declined every quarter to just $0.29 in the third quarter of 2023.
To put these figures into context, if you annualize the total dividend paid in the third quarter of 2022 ($1.55 per share), it puts Devon at a 13.4% yield based on the current share price. Contrast this with a 4.2% annualized yield based on the $0.49 total dividend in the third quarter of 2023.
So, what is the reason for the decline in the variable dividend? It comes down to a combination of a decline in the price of oil from an average of around $92 a barrel in the third quarter of 2022 to an average of $82 in the third quarter of 2023.
NYSE: DVN
Key Data Points
More dramatically, the price of natural gas fell from $8.20 per thousand cubic feet to $2.54 over the same period. Similarly, the price of natural gas liquids fell from $39.67 per barrel to $26.62.
While most of the attention centers on Devon's oil operations (and rightly so, as it generates the overwhelming majority of its revenue), the deep slump in gas prices is mainly responsible for the dividend cuts through the last year.
That said, the prices of gas and natural gas liquids appear to have stabilized in 2023, and oil is still around $77 a barrel. As such, Devon announced a total dividend of $0.77 for the fourth quarter of 2023, putting it on an annualized yield of 6.7%, and the stock remains an excellent option for income seekers.
Brookfield Renewable is a powerful way to procure plentiful passive income
Scott Levine (Brookfield Renewable): High-yield stocks are enticing, but investors want to be sure that the companies offering the dividends are committed to rewarding shareholders for the foreseeable future -- and not jeopardizing their financial well-being in the process.
That's part of the allure of Brookfield Renewable, which operates a vast portfolio of green energy assets. Its stock currently offers a forward yield of 5.2%, so it is clearly dedicated to consistently rewarding shareholders.
The company's assets have an operating capacity of 31.5 gigawatts and includes solar, wind, hydroelectric, and energy-storage assets. And it's not merely the size of the portfolio that income investors appreciate but also the nature of the business related to these assets.
NYSE: BEPC
Key Data Points
For the most part, Brookfield Renewable inks long-term power purchase agreements (PPAs) with customers. About 90% of the generating assets in the portfolio are contracted under 13-year PPAs. This provides management with excellent insight into future cash flows, allowing it to plan accordingly for capital expenditures such as acquisitions.
And there are plenty of acquisition targets on the company's radar. During a recent investor presentation, management said that the company's pipeline includes projects totaling about 134 GW of operating capacity.
Over the past 10 years, Brookfield Renewable has increased its distribution at a compound annual growth rate (CAGR) of 6%, while its funds from operations have risen at a 10% CAGR during the same period. This demonstrates management's prudent approach to hiking the dividend while maintaining the company's financial health -- something further evidenced by the company's investment-grade balance sheet.
Brookfield aims to maintain the same trajectory in the years ahead, targeting annual distribution growth of 5% to 9% and total returns of 12% to 15%.
Kinder Morgan's acquisitions ensure its financial health remains intact
Daniel Foelber (Kinder Morgan): It wasn't long ago that pipeline giants like Kinder Morgan faced doubts about the long-term viability of their business models in a low-carbon world. But sentiment has changed, and an emphasis on energy security and reliability has given legacy infrastructure assets newfound value.
Since the oil and gas crash of 2014 and 2015, Kinder Morgan has kept a tight lid on its capital expenditures (capex) to shore up its balance sheet and restore faith in its dividend after it cut it in 2015. But over the past few years, it has been gradually increasing its capex and has made a few strategic acquisitions.
In the summer of 2021, Kinder Morgan announced the acquisition of legacy energy storage and pipeline company Stagecoach Gas Services for $1.23 billion and the purchase of renewable natural gas (RNG) developer Kinetrex Energy for $310 million.
NYSE: KMI
Key Data Points
It announced the completion of its acquisition of North American Natural Resources in August 2022 for $135 million, another RNG play.
And earlier this month, it announced the $1.82 billion acquisition of NextEra Energy Partners' STX Midstream, which includes pipeline and infrastructure assets in south Texas.
All four deals make sense for Kinder Morgan because they don't overextend the company's spending and Kinder Morgan got a good deal for all four acquisitions.
For example, the Stagecoach deal came in at a high single-digit multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA) after synergies, Kinetrex was 6 times expected 2023 EBITDA, North American Natural Resources was 6 times expected 2024 EBITDA, and STX Midstream was 8.6 times 2024 EBITDA and at a long-term investment-to-EBITDA multiple of about 7 to 7.5 times.
These are lower valuations than other recent purchases in the pipeline industry.
Kinder Morgan is managing its capital well by unlocking growth opportunities while staying disciplined. That bodes well for the company's ability to keep supporting and raising its dividend. With a 15.6 price-to-earnings ratio and a 6.7% yield, Kinder Morgan looks like a great high-yield dividend stock to buy now.
