The stock market has hit several new all-time highs this year, sending most stocks soaring, leaving fewer bargains.
However, there are still a few stocks that look like a bargain. American waterworks (NYSE: AWK), Enbridge (NYSE: ENB)And Clearway Energy (NYSE: CWEN)(NYSE: CWEN.A) stand out to three Fool.com contributors right now because of their compelling investment potential. That won’t last long, though, which is why investors may want to buy up these phenomenal dividend stocks before it’s too late.
A powerful dividend growth stock
Neha Chamaria (American waterworks): Shares of American Water Works yield just over 2%. That dividend yield may disappoint income investors, but even low-yielding stocks can be great investments if they pay regular, steady dividends, backed by earnings and cash flow growth. You might be surprised to learn that with dividends reinvested, American Water Works shares have more than tripled investors’ money in just 10 years!
That’s how powerful dividend growth stocks can be. And with American Water Works’ year-over-year performance flat at the time of writing, you might want to buy some shares before it’s too late. After all, its stable business model and compelling long-term financial goals are too compelling to ignore.
American Water Works has been in business for more than 135 years and today is the largest regulated water and wastewater utility in North America. It serves nearly 14 million people in 14 states and on 18 military installations. Because it is a regulated company, American Water Works can generate steady and predictable cash flows. And to grow its cash flows, it only needs to invest regularly in its infrastructure, obtain rate increase approvals, and simultaneously seize acquisition opportunities. For example, the company expects to invest $3.1 billion in infrastructure improvements this year and has nearly $483 million in acquisitions in the pipeline.
Backed by steady growth and acquisitions, American Water Works expects earnings per share (EPS) to grow at a compound annual growth rate of 7% to 9% over the long term. And here’s the best part: The water stock also aims to grow its dividend in line with EPS, or 7% to 9% per share per year. That’s solid dividend growth, and coming from a utility, it should be safe and bankable.
Enbridge delivers the energy needed
Ruben Gregg Brouwer (Enbridge): Enbridge is often lumped in with midstream companies. And rightly so, since 75% of its earnings before interest, taxes, depreciation and amortization (EBITDA) comes from oil and gas pipelines. But that doesn’t do it justice, since Enbridge’s purpose is to provide the world with the energy it needs.
The remaining 25% of EBITDA actually comes from natural gas utilities (22%) and renewables (3%). Natural gas is expected to be a transition fuel as the world moves away from dirtier forms of energy, such as coal and oil. Renewables, such as solar and wind, are clearly the long-term direction of the energy sector, although they still make a relatively modest contribution to the global grid today. The plan is to continue to shift the mix toward cleaner alternatives as demand increases.
That’s the business that’s supporting Enbridge’s dividend, which currently yields 6.8% and is supported by an investment-grade balance sheet and a distributable cash flow payout ratio that’s well within management’s target range. The business model has supported the company’s 29 annual dividend increases. The point is, Enbridge’s yield was just over 7.5% recently before the stock started to climb. Basically, investors are starting to like Enbridge’s business approach a little more. If that continues, the still-attractive high yield here may not last much longer.
This sale could be almost over
Matt DiLallo (Clearway Energy): Shares of Clearway Energy are currently trading about 30% below their early 2022 highs, just before the Federal Reserve began raising interest rates. Higher rates have made it more expensive for companies to borrow money, slowing growth. Rising interest rates are also impacting the value of higher-yielding dividend stocks like Clearway. Their stock prices are falling, which is pushing up their dividend yields, making them more attractive to invest in compared to lower-risk options like bonds. In the case of Clearway, the sell-off has pushed up its dividend yield to almost 6%.
That high yield could not last a lot of longer. The Federal Reserve appears poised to cut interest rates. If that happens, high-yield stocks like Clearway should see a surge in share prices as they gain favor with investors, pushing their yields lower.
That catalyst contributes to Clearway’s attractive long-term view total return potential. The clean energy producer plans to grow its dividend to the upper end of its 5% to 8% annual target range through 2026, a phenomenal growth rate for such a high-yielding stock. That plan is being driven by its capital recycling strategy. It sold its thermal district business a few years ago and has re-deployed the proceeds to higher-yield renewable energy investments. It recently entered into agreements to deploy the remaining proceeds from that sale, giving it clear visibility into achieving its current dividend growth target.
The company is already working to extend its growth visibility to 2027 and beyond. Recent contract renewals for its natural gas plants are coming in at a level that could push dividend growth toward the low end of its 2027 target. In addition, the company has made offers to acquire additional renewable energy assets that it can finance with its existing financial capacity. In the meantime, as interest rates decline, it can once again finance acquisitions externally, that could make it possible that it will grow faster in the future.
Investors currently have the opportunity to lock in Clearway’s high dividend yield while interest rates remain high. Furthermore, Clearway offers high upside potential from a future recovery in share price if rates fall, and can accelerate its growth rate.
Should You Invest $1,000 in Enbridge Now?
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Matt DiLallo has positions in Clearway Energy and Enbridge. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.
3 Phenomenal Dividend Stocks You Need to Buy Before It’s Too Late was originally published by The Motley Fool
