Using conventional economic thinking, an investor should move some of their money from stocks to bonds as interest rates rise because they are less risky and the rate of return is better. So as U.S. Treasury rates hit 3%, I'm sure there are some conventional thinkers out there that will start to sell their stocks and move into bonds.
Just because it is conventional thinking doesn't mean you should follow it, though, because there are several companies out there that can yield more than 3% and provide both the stability of a reliable dividend and the upside of owning a stock. So we asked three of our contributing investors to each highlight a stock they see as a great investment yielding more than a 10-year Treasury bond today. Here's why they picked Enterprise Products Partners (EPD -0.83%), Pfizer (PFE -0.52%), and AES Corp. (AES -3.06%).
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Unparalleled payout security in the energy business
Tyler Crowe (Enterprise Products Partners): A company with a yield as high as Enterprise Products Partners is likely to give investors pause. Surely a company that has seen its share price decline 21% over the past three years and sports a 6.3% yield must have some underlying issues. Based on the company's track record, though, those numbers aren't necessarily indicative of the oil & gas pipeline and processing company's financial strength and stewardship of shareholder capital.
Enterprise is in the midst of a massive expansion phase with $5.5 billion worth of projects under construction between now and the end of 2019. Management has identified several high rate-of-return opportunities manufacturing petrochemicals from natural gas and export terminals to move crude oil and other petroleum products from the U.S. to the global market. Because of the massive capital spending requirements for these assets and growing concerns among investors in this industry about the long-term sustainability of payouts, management took the proactive step of lowering its target distribution growth rate. The cash retained from this change will help provide a significant amount of cash for capital expenditures. Once this wave of investment is complete, management has hinted at returning to faster distribution growth or even buying back shares.
If you are looking at owning a high-yield stock that you can be reasonably certain that its payout will last for a long time, then don't let Enterprise's high yield and stock price decline dissuade you. The fundamentals of this business look as strong as they ever have, and it could be an opportune time to invest.
Its cliff-diving days are over
Keith Speights (Pfizer): Income-seeking investors have liked big pharma stocks for a long time. One of the biggest of the big pharma companies, Pfizer, also claims one of the best dividends. Pfizer's dividend currently yields 3.8%. And unlike some of its peers, Pfizer isn't shelling out more to pay its dividend than it's earning.
Over the past few years, though, Pfizer hasn't had a whole lot going for it besides its dividend. The company faced a huge patent cliff, with a laundry list of drugs losing patent exclusivity. Pfizer was still able to generate revenue growth, but it wasn't enough to excite investors.
Pfizer's cliff-diving days now appear to be over. The company's lineup includes several huge winners, with blood-thinner Eliquis and cancer drug Ibrance leading the pack in growth. Pfizer also claims newer drugs with great potential, including eczema drug Eucrisa and diabetes drug Steglatro.
Even better, Pfizer's pipeline is loaded with promising candidates. The company has nearly 30 late-stage clinical programs. Pfizer believes that it can win regulatory approval for up to 15 potential blockbusters over the next five years, including new drugs and new indications for already-approved drugs. By comparison, the company launched only five blockbusters between 2011 and 2016.
Pfizer's revenue and earnings growth should gain momentum in the coming years. That's great news for investors looking for solid dividends from the drugmaker.
EPD Total Return Price data by YCharts.
A budding utility dividend champion
Neha Chamaria (AES Corp): Like most utilities, AES Corp shares have been under pressure for some months in a rising interest rate environment. However, AES has bounced back sharply after hitting 52-week lows in February -- the stock is up nearly 14% from the low point, as of this writing, and is yielding a solid 4.6%. If you believe clean and green is the future of energy, this dividend stock deserves your attention right away.
To be fair, AES doesn't really have a dividend history as it started paying a dividend only in 2013. However, AES' annual dividend has tripled in absolute terms since, or grown at a jaw-dropping compound rate of nearly 32% between 2013 and 2017.
Clearly, AES loves rewarding its shareholders with dividends, and there's more in store: AES is committed to growing its adjusted earnings per share and free cash flow by 8%-10% through 2020.
What excites me more is that AES is in a transformational phase, restructuring its portfolio and cleaning up its balance sheet to unlock greater value from its assets, which are now worth nearly $33 billion. For example, AES raised $1.05 billion in proceeds from the sale of non-core assets, primarily coal-fired plants, in March. The company used the entire proceeds to pare down debt, thereby winning a ratings upgrade to BB+ from credit rating agency S&P Global Ratings.
AES' aggressive efforts to expand its renewable energy portfolio even as it strengthens its financials make it one of my top utility dividend picks for now.
