We recently compiled a list of the 10 Best Dividend Stocks with Over 9% Yield According to Analysts. In this article, we are going to take a look at where NextEra Energy Partners, LP (NYSE:NEP) stands against the other dividend stocks with over 9% yield.
The ongoing debate between dividend yields and dividend growth has left investors split on this strategy. Although high yields can be tempting, excessively high yields can be concerning from the start. Investors are often warned against yield traps, as extremely high yields can indicate potential financial issues within the company. Investors may require a higher return to offset the increased risk associated with the investment. According to analysts, the best dividend stocks aren’t necessarily those with the highest yields. They recommend that investors look beyond just the yield and focus on stocks with reliable dividends, purchasing these stocks when they are undervalued. Dan Lefkovitz, a strategist for Morningstar Indexes, made the following comment about extremely high yields in the firm’s recent report:
“It’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield. Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps—companies that have a nice-looking yield that is ultimately unsustainable. You have to screen for dividend durability and reliability going forward.”
Does this mean investors should steer clear of high yields? While the general consensus might lean towards this, the real answer depends on the company’s fundamentals. It’s important to note that high yields aren’t necessarily a negative indicator. In fact, dividend yield becomes quite significant when investing in dividend stocks. It is a key factor as it shows how much income an investor can expect to earn from dividends compared to the stock’s price. However, factors such as the company’s cash flow generation, payout ratio, and dividend growth also need to be taken into account to fully benefit from high yields. If these metrics are strong, then stocks with high yields can also be worth considering.
Read Also Best Dividend Growth Stocks to Buy and Hold Now and 10 Best Dividend Aristocrats with Over 3% Yield.
Some reports have highlighted the long-term benefits of high-yield stocks, noting that as dividend yields increase, returns tend to rise while risk decreases. Hartford Funds recently did detailed research on this by taking annualized standard deviation into account. Standard deviation measures the volatility of a portfolio’s total returns, with a higher standard deviation indicating greater historical volatility. According to the report, from December 1969 to March 2024, high-dividend portfolios delivered an annualized return of 12.3%, mid-dividend portfolios 10.5%, and low-dividend portfolios 9.7%. The annualized standard deviations for these portfolios were 14.1%, 16%, and 20.8%, respectively.
In addition, a company’s dividend payout ratio is a crucial indicator of its ability to adjust its dividend policy. Firms that either just cover their dividends or allocate most of their earnings to dividends might face risks from competitive pressures, as their cash flow may be inadequate for operational needs. Companies with high payout ratios could experience slower future growth which may impact both share price appreciation and dividend increases.
Nuveen examined the performance of companies with high payout ratios from December 2003 to December 2023. According to the report, stocks with the highest payout ratios have not been the strongest performers over the long term historically. Among companies that have paid dividends in the past 20 years, those with medium and medium-high payout ratios have generally outperformed. We also think these attributes make a strong case for including companies with robust balance sheets and solid fundamentals for future dividend investment in a portfolio.
Our Methodology:
For this list, we screened for dividend stocks with yields higher than 9% as of August 12. Then, we narrowed down the choices by finding stocks with the highest upside potential according to analysts. Among those stocks, we chose companies that have relatively stable dividend histories, however, a lot of the companies on the list don’t have a consistent record of paying dividends due to their exceptionally high yields. They either stopped or reduced their dividend payments in 2020 due to the pandemic or because they were facing financial difficulties. The stocks are ranked in ascending order of their upside potential, as of August 12.
We’ve also mentioned the hedge fund sentiment for each stock using Insider Monkey’s Q1 2024 database. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A wind turbine silhouetted against an idyllic sunset, representing clean energy projects.
NextEra Energy Partners, LP (NYSE:NEP)
Upside Potential as of August 12: 7.31%
Dividend Yield as of August 12: 14.68%
NextEra Energy Partners, LP (NYSE:NEP) is a Florida-based master limited partnership (MLP) that focuses on the acquisition of clean energy projects. The MLP benefits from its parent company, NextEra Energy, one of the largest utility providers in the US. It primarily profits from acquiring renewable energy assets through transactions from its parent company. These sales help diversify the company’s portfolio and open up growth opportunities, contributing to strong cash flow generation. This financial stability allows the company to make positive forecasts about its future distribution per unit. Additionally, with increasing investments in renewable energy, the stock has the potential to deliver sustainable returns for investors.
NextEra Energy Partners, LP (NYSE:NEP) was in a tough spot earlier about a possible dividend cut, but it surprised worried investors by not only avoiding a reduction but increasing its quarterly dividend by 1.4% on July 24 to $0.905 per share. It is one of the best dividend stocks on our list as the company has been growing its dividends every quarter since 2015. The company managed to raise its payouts because of its cash flow generation. In the second quarter of 2024, the company’s cash available for distribution (CAFD) came in at $220 million, up from $200 million in the same period last year. In the first six months of the year, the company’s operating cash flow jumped to $309 million, from $296 million in the prior-year period. As of August 12, the stock has a dividend yield of 14.68%.
At the end of Q1 2024, 18 hedge funds tracked by Insider Monkey held stakes in NextEra Energy Partners, LP (NYSE:NEP), which remained unchanged from the previous quarter. These stakes have a collective value of nearly $150 million.
Overall NEP ranks 10th on our list of the best dividend stocks with over 9% yield. While we acknowledge the potential of NEP as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than NEP but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.