Dividend stocks, also known as income stocks, are stocks of companies that regularly distribute a portion of their earnings to shareholders in the form of dividends. Dividends are typically cash payments made on a per-share basis to shareholders as a reward for owning the company's stock. Dividend stocks are popular among income-oriented investors who seek a steady stream of income from their investments.
A high yield dividend stock is a stock that offers a relatively high dividend yield compared to other stocks in the market. The dividend yield is calculated by dividing the annual dividend per share by the stock price, expressed as a percentage.
While there is no strict definition of what constitutes a "high" yield, high yield dividend stocks typically have dividend yields that are significantly above the average yield of the broader market or the average yield of stocks in a particular sector. Generally, dividend yields above 4% to 5% are often considered relatively high.
Below is a list of three high-yield dividend stocks that I believe are attractively priced at current levels.
Philip Morris International (PM)
Philip Morris International, which spun out of Altria Group in 2008, manufactures and markets cigarettes and smoke-free products. It has underperformed the S&P 500 Index over the last five years amid the declining smoking population. Meanwhile, Philip Morris focuses on building a smoke-free future and has invested around $10.5 billion since its inception to replace cigarettes with smoke-free products.
The company appears to be moving in the right direction, with its smoke-free products generating about 35% of its overall revenue in the March-ending quarter. The solid growth in its heated-tobacco units (HTU) and oral products led to increased revenue from its smoke-free products.
As of March 31, the company had around 25.8 million IQOS (a line of HTU) users, with about 72% of them having completely stopped smoking and having adopted IQOS. Also, the shipment of its oral products, including the recent acquisition of Swedish Match, rose to 173.3 million cans in the March-ending quarter compared to a mere 3.5 million in the previous year’s quarter.
The growing adoption of HTU and the continued integration of Swedish Match have accelerated Philip Morris’s transition to a majority smoke-free company. Besides, the company recently signed an agreement to end its commercial relationship with Altria Group (MO) to market IQOS in the United States as of 2024. The agreement would allow Philip Morris to market its IQOS in the United States from April 30, 2024. So, I believe the company’s long-term growth prospects look healthy despite the declining smoking population.
Additionally, Philip Morris has raised its dividends consistently since 2008. Currently, it offers a quarterly dividend of $1.27/share, translating its forward yield to 5.64%. Analysts project the company to post an adjusted EPS (earnings per share) of $6.2 this year, representing a 3.7% year-over-year growth. So, as of June 6 closing price, it trades 14.77 times its 2023 EPS, which looks cheaper considering its long-term growth potential.
Further, analysts look bullish on the stock, with 9 of the 12 analysts covering the stock having issued a “strong-buy” rating. The average of the analysts’ price targets is $116.60, representing an upside potential of close to 27% from its June 6 closing price.
Oneok (OKE)
With a dividend yield of 6.44%, Oneok would be my second pick. Supported by an extensive network of natural gas gathering, processing, storage, and transportation assets, the company offers midstream services to natural gas producers in several states, including North Dakota, Montana, Wyoming, Kansas, and Oklahoma.
With around 90% of its consolidated earnings generated from fee-based contracts, its financials are less impacted by commodity price fluctuations. These stable cash flows appear to have allowed the company to increase its dividend consistently since 2000 at a CAGR (compounded annual growth rate) of 12%.
Meanwhile, last month, Oneok and Magellan Midstream Partners (MMP) signed a merger agreement, where Magellan Midstream’s shareholders will receive $25.00 in cash and 0.6670 shares of Oneok for each share. The merger would expand Oneok’s product offerings, offer cross-selling opportunities, increase the asset utilization rate, and offer export opportunities. Besides, the company’s management hopes to capture at least $200 million in annual synergies, potentially increasing to $400 million through asset optimization. Also, it could defer from paying the new corporate alternative minimum tax until 2027.
With Oneok expecting to close the deal in the third quarter of this year, the management projects an EPS accretion of 3-7% annually from 2025 to 2027. Besides, its free cash flow per share could accrete above 20% annually from 2024 to 2027. So, I believe the company is well-equipped to pay dividends at a healthier rate in the coming years.
For 2023, analysts project Oneok to post an adjusted EPS of $5.47, representing a year-over-year growth of 42%. As of June 5 closing price, the company trades at 10.7 times its 2023 earnings, which looks cheap, given its growth potential.
Analysts are turning increasingly bullish on Oneok. Of the 15 analysts, six analysts have issued a “strong-buy” rating compared to four analysts three months ago. Analysts’ mean price target represents a 24% upside potential from its current levels.
Clearway Energy (CWEN)
Clearway Energy owns and operates 8 gigawatts of power-producing facilities, including 5.5 gigawatts of solar and wind projects and 2.5 gigawatts of gas-fired facilities. The company sells most of the power produced from its facilities through long-term contractual agreements, with the weighted average remaining contract duration at 11 years. Supported by these long-term contracts, the company generates stable cash flows enabling it to pay dividends at a healthier rate. It currently pays a quarterly dividend of $0.3818/share, with its forward yield at 5.03%.
Last month, Clearway Energy signed an agreement with its sponsor, Clearway Group, to repower the Cedro Hill Wind project. The company expects to invest $63 million into the project and hopes to bring it into commercial operation in the second half of 2024. Besides, it raised its revolving credit facility from $495 million to $700 million, thus strengthening its financial flexibility. As of March 31, the company’s liquidity stood at $1.57 billion.
Further, Clearway Group has a solid development pipeline, with a total capacity of 29.3 gigawatts. Given the company’s relationship with Clearway Group, I expect it to benefit from these developmental projects. Given its solid growth prospects and healthy liquidity, Clearway Energy hopes to raise its dividend by 5-8% annually through 2026.
Meanwhile, Clearway Energy has been under pressure this year amid rising interest rates and softer quarterly performances. It is down over 27% from its 52-week high. With analysts expecting the company to post an adjusted EPS of $1.76 this year, it trades at 17.26 times its 2023 earnings, making it an attractive buy at these levels.
Analysts also look bullish on Clearway Energy, with three of the six analysts favoring a “strong-buy” rating. Also, analysts' average price target projects an upside potential of 24%.
On the date of publication, Rajiv Nanjapla did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
