This earnings season has featured its fair share of market-crushing results and major disappointments. The stock market is all over the place. Investors looking for a simple solution that also helps them rest easy at night may want to consider picking up shares of top high-yield dividend stocks.
Companies like American Electric Power (AEP 0.49%), Diamondback Energy (FANG 0.20%), and Clorox (CLX -0.59%) pay you dividends no matter what the stock market is doing. Here's why each stock is a buy now.
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Put a jolt in your passive income with American Electric Power
Scott Levine (American Electric Power): It may be a little early for deep holiday season price cuts, but that doesn't mean there aren't attractive stocks on sale these days. American Electric Power, for example, is currently trading at a discount, presenting a great opportunity for income investors searching for a reliable high-yield dividend stock. The electric utility stock provides a powerful way to bolster your passive income thanks to its forward dividend yield of 4.6%.
For more than 110 years, American Electric Power has rewarded shareholders with a quarterly dividend. Longevity like that is far from common, and it illustrates the resilient nature of the company's business: electricity generation and transmission. With a market capitalization of $41 billion, American Electric Power is one of the largest electric utilities found on public markets. Serving 5.6 million customers in 11 states, American Electric Power operates a portfolio that includes 40,000 miles of electricity transmission lines and about 225,000 miles of distribution lines.
Circumspect investors often are cautious with a high-yield dividend stock such as American Electric Power, fearing that the company could be jeopardizing its financial well-being to placate shareholders. This, however, doesn't seem to be the case with regard to American Electric Power. Over the past five years, the company has averaged a conservative payout ratio of 64.8%, consistent with management's targeted payout ratio of 60% to 70%.
With a price-to-earnings (P/E) ratio of 17.7, American Electric Power's stock is trading at a discount to its five-year average P/E of 20.3, suggesting it's an attractive way to put a charge in your passive income stream on the cheap.
Diamondback Energy's yield is enticing
Lee Samaha (Diamondback Energy): It almost didn't matter what oil and gas exploration and production companies reported in the third quarter; they sold off anyway. The reason for the sell-off is not hard to understand: The economy is slowing, and the price of oil is down from $90 a barrel in mid-October to less than $75, as of this writing. It's no secret that the price of oil leads most oil and gas companies' fortunes, and Diamondback is no different.
That said, it's extremely tough to predict where energy prices will go in the future, and in any case, Diamondback uses a hedging strategy to reduce the impact of energy price volatility on its earnings and free cash flow (FCF). Given that management plans to use 75% of its FCF to pay a base dividend, a variable dividend, and make share repurchases, the changes in FCF will have an impact on the dividend distribution.
Diamondback's hedges give it upside exposure when oil prices exceed $55 a barrel and protect its base dividend down to $40 a barrel. The base dividend is $0.84 a quarter, or $3.36 annualized, so the current "base" dividend yield is 2.15%. Meanwhile, Diamondback paid a variable dividend of $2.53 in the quarter.
As such, the annualized dividend yield (base plus variable, or $3.37) implies an annualized yield of 8.6% at the current price of oil. Moreover, management upgraded its full-year net production expectations to 447 thousand barrels of oil equivalent per day (Mboe/d) from a previous range of 435 Mboe/d to 445 Mboe/d.
Clearly, the market is pouring skepticism on the idea that the price of oil and natural gas will stay high enough to support an elevated dividend payout such as the one Diamondback made in the third quarter. Still, if you are willing to take a contrarian view, it's an excellent time to buy into the sector.
Clorox is poised for a turnaround
Daniel Foelber (Clorox): Clorox stock is up more than 15% in November largely in response to the company's first-quarter fiscal 2024 earnings and forecast. This may come as a surprise given that the results were not good, as the effects of a cyberattack in August wreaked havoc on Clorox's top and bottom lines.
Even after the pop, Clorox is still down more than 10% during the last three months. But the company seems well positioned to gain its footing and improve its margins, which have taken a major hit lately.
The biggest challenge facing consumer staples companies right now is inflation. Consumer staples companies tend to do well even during an economic downturn because demand for their products stays steady no matter the cycle. The issue is that companies like Clorox have had to rely on price hikes to offset higher costs. And it remains to be seen how far consumers will tolerate these hikes before there's a widespread shift away from name-brand products.
So far, companies like Procter & Gamble have had no issue implementing high-single-digit percentage price increases across their brands. And it is working. Clorox seems confident that it is poised for a turnaround and reiterated its long-term sales growth target of 3% to 5%.
Perhaps most importantly, Clorox is not cutting its dividend. Even in the midst of the cyberattacks, the company announced a $1.20 per share quarterly dividend payment in late September. The company has now paid $4.76 per share in dividends in 2023 -- an all-time high.
When a company goes through tough times, like Clorox's cyberattack paired with inflation, it provides a stress test for what long-term shareholders can expect. Clorox's commitment to its dividend and ability to overcome setbacks gives investors a vote of confidence that Clorox is a reliable passive income powerhouse to own over time.
Clorox's 3.5% dividend yield provides a sizable incentive to hold Clorox through periods of volatility. And investors who don't own Clorox may want to consider picking up some shares, especially now that the company is headed down the right path.
