Investors Should Consider Buying Two Ultra-High-Yield Dividend Stocks and Steer Clear of One

Investors Should Consider Buying Two Ultra-High-Yield Dividend Stocks and Steer Clear of One

THE S&P500 currently has a dividend yield of 1.4%. This is not very attractive to most income-seeking investors. The good news is that they have many higher yielding options. Many companies offer dividends yielding more than four times the S&P 500.

However, investors should exercise caution when investing in stocks with extremely high dividend yields, as not all of these payouts are sustainable. The monstrous return offered by the industrial giant is more questionable. 3M (NYSE:MMM). On the other hand, the big gains of Enbridge (NYSE:ENB) And Clearway Energy (NYSE:CWEN.A)(NYSE:CWEN) seem very durable. Here’s why income investors should buy these two stocks while avoiding 3M for now.

A reset after the spin?

3M currently yields 5.8%, one of the highest yields in the S&P 500. On the one hand, the industrial company can easily afford this payment. Last year, it generated $6.3 billion in adjusted free cash flow (up 30% from 2022), easily covering its $3.3 billion in dividends. The company used the excess free cash flow to strengthen its already strong balance sheet. Net debt fell 17% to $10 billion.

However, concerns remain about the future of the dividend. Even though 3M has a long history of increasing dividends, it could end in 2024. Last year, the company agreed to settle two multibillion-dollar legal claims. One of the ways he plans to finance these regulations is to spin off its healthcare operations into a new company called Solventum, which is expected to emerge next month. 3M will receive a cash distribution from this business and will retain a 19.9% ​​stake which it intends to monetize over the next five years. This transaction will give the company some cash to fund its legal settlements.

The problem is that the company’s healthcare unit contributes more than a quarter of its revenue and operating profit, which could mean 3M may have to revisit its dividend as a result. of the split to reflect its falling profits and finance its legal settlements. This downside potential is why income-oriented investors should avoid 3M for now.

The fuel to continue increasing its dividend

Enbridge offers investors a higher dividend yield than 3M, at 7.6%. The Canadian utility and pipeline company also has high visibility to increase this payment in the future, which it has done for 29 consecutive years.

The company generates very stable cash flow (98% comes from predictable cost of service or contractual agreements). Meanwhile, it only pays out 60-70% of its regular cash flow as dividends. This gives it a big cushion while allowing it to retain significant liquidity to finance expansion projects.

Enbridge has a huge backlog of energy infrastructure projects currently under construction, giving it great visibility into cash flow growth. Additionally, it is purchasing three high-quality natural gas utilities this year. These factors lead it to believe it will grow its cash flow per share by at least 3% per year through 2026 and 5% per year over the medium term. This should give Enbridge the fuel to increase its dividend by up to 5% per year in the medium term.

A fully powered growth plan

Clearway Energy also offers a higher yielding dividend (currently 7.6%), which is expected to continue to grow. The clean energy infrastructure company plans to increase its payouts toward the upper end of its 5% to 8% annual target range through 2026.

Two factors are fueling this plan. First, the company generates very stable cash flow. It sells the electricity it produces under long-term contracts with utilities and large companies, giving its payments a solid basis.

On top of that, the company leveraged the value of its thermal business in 2022. It recycled that capital into higher-yielding renewable energy investments. Clearway has already secured the necessary investments to support its dividend growth plan. The company has the opportunity to increase its cash available for distribution from $342 million last year to $435 million as these development projects come online over the next few years. Meanwhile, the company should have no problem continuing to grow its cash flow and dividends beyond 2026. It has several catalysts, including rising electricity prices, debt refinancing and additional acquisitions.

Focus on visible growth

Although 3M has been a great dividend stock over the years, there is a lot of uncertainty about the future of the payout. The company could decide to reset its dividend following its healthcare spin-off.

Income-oriented investors should avoid 3M until the future of payment is clearer. They should buy Enbridge and Clearway Energy instead. They offer higher yield payouts, which are expected to continue to grow over the coming years. These characteristics make them much more attractive income stocks today.

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Matt DiLallo holds positions in 3M, Clearway Energy and Enbridge. The Motley Fool holds positions with and recommends Enbridge. The Motley Fool recommends 3M. The Mad Motley has a disclosure policy.

2 Very High-Yielding Dividend Stocks to Buy and 1 to Avoid was originally published by The Motley Fool

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