The stock market has pulled back recently, but it hit a new all-time high this year. Strong economic growth, the prospect of interest rate cuts, and catalysts like artificial intelligence have driven most stocks skyward.
However, not all companies have participated in the rally. Stanley Black & Decker(NYSE: SWK), NextEra Energy(NYSE: NEE), and Brookfield Renewable(NYSE: BEP) stand out to a few Fool.com contributors because their shares currently sit 32% to 56% below their all-time highs from a few years ago. Because of that, 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 turning an important corner
Reuben Gregg Brewer (Stanley Black & Decker): With a dividend yield of roughly 3.5% some investors might not view Stanley Black & Decker as a high-yield stock. But the S&P's yield is a miserly 1.3% and the average industrial stock, using the iShares U.S. Industrials ETF as a proxy, is only yielding 0.9%. Oh, and Stanley Black & Decker's yield happens to be near the highest levels in the company's recent history. The last time the yield was as high as it is today was during the Great Recession!
Of course, given the basic math of dividend yields, the reason Stanley Black & Decker's yield is so high is because the stock has fallen a painful 55% or so from its 2021 highs. There was a very good reason for that drop, too. Adjusted earnings in 2021 came in at $10.48 per share and promptly fell in each of the next two years, declining to just $1.45 in 2023.
But management has been working hard to reduce debt, streamline the business, and cut costs. Margins have been improving over the past year or so. The company expects 2024 adjusted earnings to fall between $3.50 and $4.50 per share. Assuming it can achieve that outcome, Wall Street will likely start to look more favorably on the shares.
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 story, but you are getting paid well to wait for Stanley Black & Decker's revamped business plan to bear fruit -- which should start in 2024.
Powerful dividend growth ahead
Matt DiLallo (NextEra Energy): Shares of NextEra Energy have lost nearly 20% of their value over the past year and now sit about 32% below its all-time high in early 2022. The slump has pushed the utility's dividend yield down to 3.2%. That's near its highest level in the past decade and more than double the S&P 500's dividend yield.
NextEra Energy has a magnificent track record of paying dividends. The utility has increased its payout for 30 straight years. It has grown its dividend at an 11% compound annual rate over the last decade, including by 10% earlier this year.
NextEra Energy expects to continue delivering high-powered dividend growth for at least the next few years. It extended its growth outlook until at least 2026, targeting to increase its payout by roughly 10% annually off this year's base.
Two factors power that plan. It has a low dividend payout ratio (59% compared to the 65% average of its utility peers). On top of that, the company has a strong growth outlook. It 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 high end of that range. NextEra Energy is growing faster than most of its peers 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 produce a powerful total return in the coming years.
Down despite powerful growth ahead
Neha Chamaria(Brookfield Renewable): Brookfield Renewable Partnership's primary objective pertains to dividends: Its annual report says its "objective is to pay distributions that are sustainable on a long-term basis while retaining sufficient liquidity for recurring growth capital expenditures and general purposes." Brookfield Renewable Partnership is a master limited partnership (MLP), and dividends are called distributions in MLP parlance. Shares of its corporate sibling, Brookfield Renewable Corporation, pay dividends.
In line with its objective, Brookfield Renewable has consistently rewarded its investors by not only paying a regular dividend but also growing it steadily over time: Brookfield Renewable Partnership has grown its dividend at a compound annual growth rate of 6% over two decades now. Investors can continue to expect steady dividend growth from this stock for three reasons: The bulk of its cash flows are contracted and therefore stable, management is consistently investing in growth, and it is committed to growing distributions over time.
So between 2023 and 2028, Brookfield Renewable is targeting at least 10% growth in funds from operations (FFO) per unit, driven by its development pipeline, margin improvements, inflation escalation clauses within contracts, and potential mergers and acquisitions. That FFO growth target looks feasible, and the company believes it should be sufficient to support 5% to 9% growth in annual distributions during the period. With Brookfield Renewable Partnership stock also yielding a solid 6.1%, that growth plus high yield could mean double-digit annual returns for shareholders. That makes this high-yield stock, now down 56% from its all-time high in 2021, a pretty compelling buy for the long term.
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Matt DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, and NextEra Energy. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in 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.
