The stock market has been declining recently, but has reached a new all-time high this year. Strong economic growth, the prospect of interest rate cuts and catalysts like artificial intelligence have pushed most stocks higher.
However, not all companies took part in the rally. Stanley Black & Decker (NYSE:SWK), NextEra Energy (NYSE:NO)And Brookfield Renewables (NYSE:BEP) Some Fool.com contributors notice that their stocks are currently 32% to 56% below their all-time highs from a few years ago. That’s why these top dividend stocks offer much higher yields. Add in their compelling growth prospects and recovery potential and they could deliver strong total returns from here.
Stanley Black & Decker is facing an important turning point
Reuben Gregg Brewer (Stanley Black & Decker): With a dividend yield of around 3.5%, some investors may not consider Stanley Black & Decker to be a high-yield stock. But the S&P’s yield is a measly 1.3%, and the average industrial stock’s iShares US Industrials ETF as a proxy: the return is only 0.9%. Oh, and Stanley Black & Decker’s ROE happens to be near the highest level in the company’s recent history. The last time yields were as high as they are today was during the Great Recession!
Of course, given the basic math of dividend yields, Stanley Black & Decker’s yield is so high because the stock is down around 55% from its 2021 highs. There was also a very good reason for this decline. Adjusted earnings were $10.48 per share in 2021 and declined promptly in each of the next two years, falling to just $1.45 in 2023.
But management has worked hard to reduce debt, streamline the business and reduce costs. Margins have improved over the last year or so. The company expects adjusted earnings to fall between $3.50 and $4.50 per share in 2024. Assuming that outcome can be achieved, Wall Street will likely become more positive on the stock.
Simply put, you are buying a Dividend King (56 consecutive annual dividend increases) with a historically high and above industry average yield. Yes, it’s a turnaround, but you’ll be paid handsomely to wait for Stanley Black & Decker’s revised business plan to come to fruition – which should begin in 2024.
Strong dividend growth is coming
Matt DiLallo (NextEra Energy): Shares of NextEra Energy have lost nearly 20% of their value over the past year and are now about 32% below their all-time high set in early 2022. The plunge has pushed the utility’s dividend yield down to 3.2%. This is almost the highest value in the last decade and more than double S&P 500Dividend yield.
NextEra Energy has an excellent track record of paying dividends. The utility has increased its payout for 30 consecutive years. The company has increased its dividend at an average annual rate of 11% over the past decade, including 10% earlier this year.
NextEra Energy expects the company to continue delivering strong dividend growth for at least the next few years. The company extended its growth prospects through at least 2026 and targeted an annual payout increase of around 10% over this year’s base level.
There are two factors behind this plan. It has a low Payout ratio (59% compared to the 65% average for comparable utilities). Additionally, the company has strong growth prospects. The company expects to grow its adjusted earnings per share by 6% to 8% annually through 2026, with operating cash flow expected to grow at or above the upper end of that range. NextEra Energy is growing faster than most of its competitors due to its focus on Florida (low-cost solar and above-average population growth) and investments in renewable energy.
With a lower share price, higher dividend yield, and strong earnings and dividend growth prospects, NextEra Energy could deliver strong total returns in the coming years.
Decline despite strong growth
Neha Chamaria (Brookfield Renewable): Brookfield Renewable Partnership’s primary objective concerns dividends: its annual report states: “The objective is to pay long-term sustainable distributions while maintaining sufficient liquidity for recurring growth investments and general purposes.” Brookfield Renewable Partnership is a Master Limited Partnership (MLP), and dividends are called distributions in MLP parlance. shares of its sister company, Brookfield Renewable CorporationPay dividends.
Consistent with its mission, Brookfield Renewable has consistently rewarded its investors by not only paying a regular dividend, but also steadily increasing it over time: Brookfield Renewable Partnership has grown its dividend at a compound annual growth rate of 6% over two decades elevated. Investors can continue to expect consistent dividend growth from this stock for three reasons: the majority of cash flows are contracted and therefore stable, management continually invests in growth, and it aims to increase payouts over time.
As such, Brookfield Renewable is targeting at least 10% growth in funds from operations (FFO) per unit between 2023 and 2028, driven by its development pipeline, margin improvements, inflation escalation clauses in contracts, and possible mergers and acquisitions. This FFO growth target appears feasible and the company believes it should be sufficient to support annual distribution growth of 5% to 9% over the period. With Brookfield Renewable Partnership stock also yielding a solid 6.1%, this growth combined with the high yield could mean a double-digit annual return for shareholders. That makes this high-yield stock, now 56% below its 2021 all-time high, a pretty compelling buy over the long term.
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Matt DiLallo holds positions at Brookfield Renewable, Brookfield Renewable Partners and NextEra Energy. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer holds positions at Stanley Black & Decker. The Motley Fool has positions in and recommends Brookfield Renewable and NextEra Energy. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
“3 Great High-Yield Dividend Stocks Falling Between 32% and 56% to Buy Now” was originally published by The Motley Fool