A stock's dividend yield moves in the opposite direction of its stock price. If shares fall, the yield rises, while a rally would push its yield lower. Because of that, volatility can provide investors with opportunities to lock in higher yields on high-quality dividend stocks.
Dominion Energy(NYSE: D), Chevron(NYSE: CVX), and Brookfield Renewable(NYSE: BEPC)(NYSE: BEP) currently stand out to these Motley Fool contributors for their current high dividend yields. Here's why they think investors might want to pounce on this opportunity while it lasts.
Dominion Energy is strengthening its core
Reuben Gregg Brewer (Dominion Energy): Dominion Energy is a large regulated utility serving over 4.5 million customers in 13 states. It has gone through a multidecade transition to simplify a business that once included oil drilling and a midstream pipeline operation.
The transformation to a new, low-risk business model has not been smooth, with the sale of the pipeline business to Berkshire Hathaway leading to a dividend cut. Nearly as bad, management promised dividend growth after that cut, and then reneged, holding the dividend steady as more noncore assets were sold.
So what's going on today? Dominion is working to sell three natural gas utilities to Enbridge and will use the proceeds to strengthen its balance sheet and fund investment in its core electric utility operations.
As it refocuses around this business, management expects earnings to grow between 5% and 7% a year through 2029. That should allow the payout ratio to decline back into a more normal range and, once that happens, dividend growth will resume. And that should be at a similar pace to earnings growth, or at least that's the plan.
But here's the real attraction: Dominion Energy's dividend yield is a hefty 5% right now, while the average utility is yielding just 3.2%. Yes, you'll have to wait a little bit for the turnaround to take shape, but you are getting paid very well to wait.
And when the dividend starts to grow again, assuming management can live up to that promise, investors are likely to afford Dominion a higher valuation. Is there a rush here? No, but if you wait too long, you might miss out on a great income opportunity.
Lots of fuel to continue growing its dividend
Matt DiLallo (Chevron): Shares of Chevron currently sit more than 15% below their 52-week high due to a combination of factors, including lower oil prices and delays in closing its acquisition of Hess. That slump has pushed Chevron's dividend yield up to 4.5%, well above the S&P 500's average around 1.5%.
Chevron's sell-off comes even though it's producing strong results. Global production rose 11% in the second quarter, led by its acquisition of PDC Energy and growth in the Permian and DJ Basins. Meanwhile, it produced $4.7 billion of adjusted earnings in the period and $6.3 billion of cash flow from operations.
The company's strong cash flow and balance sheet enable it to return boatloads of cash to investors. It paid $3 billion in dividends and repurchased $3 billion of shares in the second quarter, its ninth straight quarter of returning over $5 billion to investors. It has sent them $50 billion over the past two years.
Chevron continues to make high-return investments, positioning it to grow its free cash flow more than 10% annually through 2027 (assuming oil averages around $60 a barrel). That would give it more fuel to increase its dividend, which it has done annually for more than 35 straight years.
Meanwhile, there's ample upside to its base plan from higher oil prices and its ability to close its needle-moving Hess deal. Chevron estimates that the acquisition would enable it to more than double its free cash flow by 2027 at $70 oil.
So, while Chevron stock might be down now, it has ample upside catalysts that could push shares higher. That's why investors might want to pounce and lock in its currently very compelling dividend yield before its shares bounce back.
A high-quality dividend growth stock
Neha Chamaria(Brookfield Renewable): Brookfield Renewable Partners' yield of 5.8% is backed by regular dividends that are also growing with time. Yet the stock is hugely underperforming the S&P 500 and is still down about 7% so far this year, as of this writing.
Shares of its corporate twin, Brookfield Renewable Corporation, are down about 4% this year and yield 5.1%. I believe it's only a matter of time before investors start to see the potential in Brookfield Renewable, and you might want to scoop up some shares while you still can. Here are three reasons:
First, the future of energy is in renewables, and Brookfield is already one of the world's largest pure plays in renewable energy.
Second, Brookfield Renewable has a solid track record of growing its funds from operations (FFO) and strives to maintain the trend. It grew its FFO per unit at a compound annual rate (CAGR) of 12% between 2016 and 2023 and is targeting at least 10% growth in annual FFO per unit through 2028, driven primarily by its development pipeline and potential margin improvements and merger and acquisitions.
Third, Brookfield Renewable is a solid dividend stock committed to rewarding shareholders. It has grown its dividends steadily since 2001, clocking a CAGR of 6%; and is targeting 5% to 9% annually in the long term. With that kind of a track record and dividend growth potential, this high-yield stock is a solid buy now.
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Matt DiLallo has positions in Berkshire Hathaway, Brookfield Renewable, Brookfield Renewable Partners, Chevron, and Enbridge. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Dominion Energy and Enbridge. The Motley Fool has positions in and recommends Berkshire Hathaway, Brookfield Renewable, Chevron, and Enbridge. The Motley Fool recommends Brookfield Renewable Partners and Dominion Energy. The Motley Fool has a disclosure policy.
