Dividend stocks lost some sheen over the last couple of years, as higher interest rates lowered the appeal of fat dividend yields. However, with a September rate cut looking like the most likely scenario, high-yielding stocks could be back in action. I believe Enbridge (ENB) and Rio Tinto (RIO) are two dividend stocks yielding almost 7% that investors can buy in August.
To begin with, the probability of a September rate cut has risen over the last month amid the volatility in stock markets and weak economic data – especially the July unemployment number. Almost half of the traders polled by the CME FedWatch Tool now see the Fed cutting rates by 50 basis points at the September meeting, while the odds were a mere 6% a month back.
Once interest rates come down from multi-year highs, some investors might find it attractive to hold stocks with fat dividend yields.
Enbridge Pays Over 6% Dividend Yield
Midstream energy company Enbridge has an annual dividend yield of 6.84%. The company has paid dividends for 69 consecutive years, and has increased them for the last 29 years at a CAGR of 10%. It’s a Dividend Aristocrat that strives to target a payout ratio between 60%-70% of its distributable cash flows (DCF).
Enbridge increased its 2024 quarterly dividend by 3.1% to $0.915. It has quite stable and predictable earnings and has met its guidance for 18 years. The company expects its annual DCF to increase by 3% on average until 2026, after which it forecasts a 6% annual growth. Growth in DCF would mean that Enbridge would have legroom to increase dividends further.
The company’s stable and predictable dividends make the stock attractive for those who expect a high degree of predictability from their investments. In terms of valuation, Enbridge trades at a next 12-month (NTM) price-to-earnings (PE) multiple of 17.8x, which is largely in line with its average multiples over the last five years.
Analysts Rate Enbridge as a Moderate Buy
Enbridge has a consensus rating of “Moderate Buy” from analysts, and its mean target price of $39.47 is only marginally higher than current price levels. However, its Street-high target price of $44.85 is 13.9% higher than Tuesday’s closing prices.
Overall, given the company’s stable earnings and the combination of growth and dividends that it brings to the table, ENB can be worth a buy for conservative investors.
Rio Tinto’s Dividend Yield Is Almost 7%
While Enbridge has a stable earnings and dividend profile, Rio Tinto would be at the opposite end of the spectrum. Until early 2016, Rio Tinto and rival miner BHP Group (BHP) practiced what was known as a “progressive dividend policy.” Under that policy, they increased dividends every year, or at least tried to pay the same dividend.
As investors might recall, that year commodity prices slumped, and miners went into overdrive to lower their costs. The axe also fell on the progressive dividends, which were already unsustainable in the first place, given the industry's cyclical nature.
RIO now intends to pay between 40%-60% of its underlying earnings as dividends over the cycle. Its payout has been at the upper end of the range for the last 8 years since it pivoted to the new dividend policy.
Rio Tinto’s earnings are correlated to commodity prices - especially iron ore (TRY00), which accounts for the lion’s share of its profits, followed by aluminum (ALQ24) and copper (HGU24). While iron ore prices have been particularly weak in 2024, I believe a Fed pivot to rate cuts should help propel commodity prices.
Aggressive Investors Can Consider RIO For Its High Dividend Yield
While I have been circumspect about RIO in the past, the recent decline has made the stock’s risk-reward a lot more favorable. It trades at an NTM enterprise value-to-earnings before interest, tax, depreciation, and amortization (EV-to-EBITDA) multiple of 4.56x, which is a slight discount to what this multiple has averaged over the last five years. Its valuations are also at a discount to peers, especially BHP.
To be sure, if the global macro environment worsens – and especially if Chinese growth deteriorates further - RIO shares will come under pressure. However, the rising probability of a Fed rate cut – which could spur a wave of monetary policy loosening across the world – balances out the risk. Overall, for aggressive investors looking for a combination of high dividends and decent capital appreciation, RIO stock should fit the bill.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
