Dividends are a form of payment made by a corporation or company to its shareholders, representing a portion of its profits or earnings. When a company generates profits, it may choose to distribute a portion of those profits to its shareholders as dividends. Dividends are typically paid in cash.
Dividends are typically paid on a regular basis, such as quarterly or annually, but they can also be paid irregularly or as special one-time payments, depending on the company's financial performance and management's decision. The amount of dividends paid to each shareholder is usually proportional to their ownership stake in the company.
A high-yield dividend refers to a dividend payment that is relatively large compared to the price of the underlying stock. It is typically expressed as a percentage, known as the dividend yield, which is calculated by dividing the annual dividend payment by the current stock price, and then multiplying by 100 to express it as a percentage.
Investors may seek to invest in high-yield dividend stocks as a strategy to generate income from their investments. High-yield dividend stocks are typically associated with mature, established companies that generate consistent profits and have a history of paying dividends.
As dividend payouts are not guaranteed, you need to identify companies with attractive and sustainable yields. Ideally, these companies should expand earnings and cash flows each year, allowing them to increase dividends as well.
Dividend yields and share prices have an inverse relationship. So, if a company’s share prices decline, its forward yield will increase and vice versa. In case a stock offers investors a high-yield dividend, it makes sense to analyze if the share prices have pulled back due to broader market sentiment or company-specific reasons.
Keeping these factors in mind, here are three high-yield dividend stocks that Wall Street analysts thinks will gain more than 30% in the next 12 months.
Energy Transfer (ET)
Energy Transfer (ET) is a master limited partnership (MLP), and pays investors annual dividends of $1.22 per share, translating to a forward yield of 9.67%. MLPs are exempt from corporate taxes if they distribute over 90% of their net income to shareholders, which also results in higher yields.
Part of the highly cyclical energy sector, Energy Transfer cut its dividends by 50% at the onset of COVID-19. However, a lower payout allowed the company to strengthen its balance sheet and reduce debt.
Energy Transfer owns and operates 11,600 miles of natural gas transportation pipeline and five natural gas storage facilities. The company also sells natural gas to electric utilities and independent power plants as well as industrial end-users.
A higher pricing environment in 2022 allowed Energy Transfer to increase dividends by 75% year over year. While it is unlikely to increase dividends significantly this year, Energy Transfer’s payouts have risen by almost 10% annually since June 2006.
Rising oil prices in the last 12 months allowed Energy Transfer to end Q4 of 2022 with $1.9 billion in free cash flow. It paid less than $1 billion to investors via dividends, indicating a payout ratio of 50%, providing the company with enough cash to expand its base of cash-generating assets. Energy Transfer aims to spend between $1.6 billion and $1.8 billion in capital expenditures this year, which should increase future cash flows.
Analysts expect Energy Transfer to increase adjusted earnings by 1.4% in 2023 to $1.43 per share. So, Energy Transfer stock is priced at 10x forward earnings, which is quite cheap.
Out of the 11 analysts covering Energy Transfer stock, 10 have a “strong-buy” rating, and one has a “moderate-buy” rating. The average target price for the company is $16.82, which is 33% above the current trading price. Down 64% from all-time highs, ET stock has returned 76% to investors in the last ten years.
British American Tobacco (BTI)
Another dividend-paying giant is British American Tobacco (BTI), which manufactures and distributes tobacco and nicotine products globally. BTI stock pays investors annual dividends of $2.80 per share, indicating a forward yield of 7.85%.
Valued at a market cap of $79 billion, British American Tobacco reported sales of $27.6 billion in 2022. It continues to expand its product portfolio, which now includes vapes and nicotine patches. These non-combustible products were sold to 22.5 million customers in 2022, an increase of 23% year over year. British American Tobacco aims to increase its non-combustible customer base to 50 million through 2030.
An expanding customer base should drive BTI’s earnings higher. Analysts expect adjusted earnings to rise to $4.91 per share in 2024, up from $4.59 per share in 2022. Priced at 7.2x forward earnings, British American Tobacco stock is trading at a discount of 55% to consensus price target estimates.
Out of the four analysts covering BTI stock, three have a “hold” rating, and one recommends a “buy.”
Sociedad Química y Minera (SQM)
The final high-dividend stock on my list is Sociedad Química y Minera (SQM) which offers you a forward yield of 10.1%. A diversified company SQM produces and distributes specialty plant nutrients, iodine, lithium, industrial chemicals, and other products. In fact, SQM is the world’s largest lithium producer, providing you exposure to one of the most sought-after rare-earth metals. Based out of Chile, SQM also provided portfolio diversification.
Robust demand for lithium and higher prices allowed SQM to report revenue of $10.7 billion and a net income of $3.9 billion in 2022. Comparatively, its sales in 2021 totaled $2.86 billion with a net income of $585 million.
This massive uptick in profit margins also boosted SQM’s liquidity position, as it now has a cash balance of $3.6 billion and less than $2 billion in debt. The mining giant is well poised to expand its asset base and venture into new markets, such as Australia, to meet demand from electric vehicle manufacturers.
Four of the seven analysts tracking SQM stock have a “strong-buy” rating, and the rest recommend a “hold.” Moreover, the average price target for the stock is $102.38, which is 33% above current prices.
On the date of publication, Aditya Raghunath 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.
