It’s not easy to find an attractive yield these days. While the Federal Reserve has started raising interest rates, they remain near all-time lows. For this reason, yield-oriented investments, such as dividend-paying stocks, offer poor payouts. For example, the current dividend yield on the S&P500 is near a two-decade low of around 1.3%.
However, there are higher yield opportunities in the current low yield environment. Three stocks currently offering well above average dividend yields are 3M ( MMM -0.09% ), Crestwood Equity Partners ( CEQP 0.69% )and Atlantica Sustainable Infrastructure (AY -2.33% ). Here’s why income-oriented investors will want to take a closer look at this high-yielding trio.
Strike while the iron is hot
Reuben Gregg Brewer (3 months) : With the S&P500 yielding a paltry 1.3%, industrial giant 3M’s roughly 4% dividend yield is significantly high relative to the market. But it also happens to be high relative to the company’s own historical performance range. In fact, in the past 25 years, performance has only been as high two other times. If history is any guide, now is the time to buy this stock.
There are a few key things to keep in mind. First, 3M is a dividend king with more than six decades of annual dividend increases under its belt. Management clearly places increasing the dividend each year at the top of the priority list. Second, every company’s fortune waxes and wanes over time. Right now, 3M is in the proverbial barrel.
The reason for this pessimistic outlook here is due to lawsuits over environmental and product issues. Such lawsuits are not unusual for a large, diversified industrial company, although the ones 3M faces could be costly if it loses. Hence the negative sentiment that offers long-term contrarian investors an opportunity to buy the stock at what appear to be bargain prices.
Here’s what you need to believe if you jump on board: Investment-listed 3M, with a market capitalization of $85 billion, can handle the financial impact if it loses. If you look at, say, the tobacco industry or even Johnson & Johnsonis it so hard to believe that 3M will manage largely intact? I for one am grabbing this high yielding stock while I still can.
This high yield should continue to increase
Matt DiLallo (Crestwood Equity Partners): Crestwood Equity Partners is offering a stunning 8.4% yield. This is mainly due to the low value that investors are willing to pay for master limited partnerships (MLPs) these days due to the volatility in the energy sector. Crestwood currently expects to generate over $500 million in cash flow in 2022. With a market capitalization below $3 billion, it brings about six times the cash flow.
This low valuation allows income-oriented investors to secure a lucrative income stream. Crestwood expects to generate enough cash to cover its large distribution at least twice this year. This is after factoring in its plan to raise the rate by 5% following its acquisition of fellow MLP Oasis Midstream Partners. This will leave MLP with enough cash to cover its projected $160-180 million expansion-related expenses with $75-135 million in reserve. This excess cash will provide Crestwood with additional financial flexibility to strengthen its already strong balance sheet, repurchase stock and make new growth-related investments.
Given its strong financial profile and valuations in the MLP space, Crestwood wants to be a consolidator in the sector. It targets transactions that significantly increase its size, improve its relevance in key pools, increase the strength of its balance sheet and create long-term value for investors. The Oasis agreement achieved all of these objectives. It also put the MLP in a position to continue consolidating the sector.
Combined with its other expansion-related investments, these transactions should allow Crestwood to continue to increase its cash flow. This should give it the funds to provide further distribution growth in the years to come, making it a great option for yield-oriented investors.
An unsung but reliable dividend growth stock
Neha Chamaria (Atlantica Sustainable Infrastructure): Atlantica Sustainable Infrastructure currently yields 5%, and there are two reasons to believe that this return is not only sustainable, but could even grow: the industry in which the company operates and its recent growth moves.
Atlantica Sustainable primarily owns and operates wind and solar power assets, and also has interests in natural gas and geothermal. In 2021, 77% of the company’s revenue came from renewable energy. Renewable energy has exponential growth potential as more countries around the world strive to transition from fossil fuels to clean energy.
Importantly, nearly all of Atlantica Sustainable’s revenue is contracted or regulated, which means the company can earn stable, predictable revenue and cash flow at all times. This is perhaps the main reason why Atlantica Sustainable can pay regular dividends and even increase them along with its cash flow. Through 2025, the company expects cash available for distribution to increase by 5% to 8%, driven by a combination of organic growth, acquisitions and the advancement of its development pipeline. Because Atlantica Sustainable also has a healthy balance sheet, it can afford to invest in growth and increase dividends without too much worry.
It all ultimately boils down to one thing: strong returns for shareholders in the form of reliable passive income and high yield. So if you think it’s hard to find good high-yielding stocks amid the current market volatility, you might want to take a look at Atlantica Sustainable.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.