High-yield dividend stocks can be sources of passive income no matter what the stock market is doing. But they have notably greater importance now that interest rates are rising.
Many high-yield savings accounts now offer interest rates of more than 4%, which creates a real opportunity cost for investing in stocks that simply didn’t exist when interest rates were close to 0%. Devon Energy (DVN 2.42%), Mativ Holdings (MATV 0.84%), and Kinder Morgan (KMI 0.87%) are dividend stocks that not only have significantly higher yields than the risk-free rate, but have growing businesses that could drive share price appreciation, too. Here’s what makes each of them worth considering now.
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Grease the wheels of your passive income machine with Devon Energy
Scott Levine (Devon Energy): Looking to fulfill that New Year’s resolution to increase your passive income, but unwilling to break the bank to achieve it? Well, Devon Energy, with its juicy 8.4% forward yield, is ripe for the picking. Currently, shares of the exploration and production company are available on the cheap, trading at 7 times forward earnings — a steep discount to their five-year average forward earnings multiple of 19.2.
It’s common for energy companies to pay dividends, but Devon has adopted an unusual approach to those distributions. Two years ago, Devon debuted its fixed-plus-variable dividend policy. About 10% of the company’s quarterly operating cash flow is regularly used to fund the fixed portion of the distribution. Up to 50% of its excess free cash flow is dedicated to the variable component.
Over the past three months, Devon Energy’s stock has failed to energize the market’s enthusiasm like it did last year. With energy prices falling, investors have shied away out of concern that management would trim the dividend — which it did. During the company’s Q3 2022 earnings report, it announced a $1.35 per share dividend payable in the fourth quarter, a 13% decrease from its prior distribution. The company may shave its payout even further next time, as it has reported that it encountered operational challenges in Q4 resulting from adverse weather conditions.
Nonetheless, those seeking attractive high-yield dividend stocks shouldn’t be scared off. Devon Energy’s generous capital returns to shareholders and its focused attention on maintaining its financial health make it a highly desirable investment.
Investors hope Mativ’s transformation pays off
Lee Samaha (Mativ): Specialty materials and paper company Mativ may not be the highest-quality company on the market, and it faces significant near-term headwinds. Still, its 6.3% dividend yield and transformation prospects make it a stock well worth monitoring.
The company was created last summer via a merger of equals between Schweitzer-Maudit and Neenah. There were two broad reasons behind the merger. The first involved the classical rationales of building scale in a mature industry: It aims to take advantage of cost synergies (to the tune of more than $65 million a year), expand its geographic reach and broaden its product portfolio. Achieving revenue growth in a mature industry like paper and specialty materials is always difficult, so this sort of merger often makes sense. (The post-merger operation expects to generate $2.75 billion in revenue in 2023.)
The second reason comes from the former Schweitzer-Maudit’s ongoing evolution. Spun out of Kimberley-Clark in 1995, up until 2013, Schweitzer-Maudit was a “tobacco-centric paper operation” including tobacco papers and reconstituted tobacco. However, since 2013, management has used the cash flow from its tobacco-related business to support acquisitions in resins, films, and other performance materials companies. The merger with Neenah (filtration materials, release liners, industrial and fine paper) was a continuation of its effort to diversify away from tobacco-based revenue and build scale.
Unfortunately, it won’t be smooth sailing in 2023. Mativ’s management has already told investors that its earnings in the second half of 2022 will be below prior expectations due to a “cybersecurity incident,” “demand uncertainty,” and a “rapid escalation in energy costs, particularly in Europe.” So, don’t be surprised if there’s more bad news to come in 2023.
Still, suppose Mativ can work through this difficult period and execute on generating synergies from the merger. In that case, investors will be able to enjoy a 6.3% while they wait for an easier operating environment.
Kinder Morgan is a much safer dividend stock than in years past
Daniel Foelber (Kinder Morgan): Kinder Morgan’s forward dividend yield of 6.1% naturally puts it near the top of many S&P 500 dividend screeners. But investors should question whether it can keep paying and raising that dividend, or if its yield is artificially high due to a falling stock price.
Take one look at Kinder Morgan’s track record since going public in February 2011, and you might jump to the conclusion that the stock is best avoided. But some context is in order.
KMI Total Return Level data by YCharts.
Similar to the many unprofitable tech stocks that went public in 2021, Kinder Morgan went public during a boom time in its industry — oil and natural gas — but then crashed hard along with the market in 2015. An overleveraged balance sheet paired with a dividend it couldn’t afford led Kinder Morgan to slash its payout by 75% and sharply dial back its capital expenditures. However, since then, the company has been working to regain investors’ trust. And to management’s credit, it has done a masterful job of keeping a tight lid on spending, focusing on generating free cash flow to support dividend raises, and paying down debt. The following charts sum it up nicely.
KMI Capital Expenditures (TTM) data by YCharts.
Capital expenditures and total net long-term debt are now well below their pre-2015 crash levels. The company is devoted to keeping control of its leverage even as it grows its investments in liquefied natural gas (LNG) and renewable natural gas (RNG). LNG is natural gas that has been cooled and condensed for export, whereas RNG is produced by the natural decay of sewage, municipal solid waste, livestock waste, or other sources, and does not require extracting the gas from underground reserves.
Given the growth potential of the LNG and RNG businesses, as well as Kinder Morgan’s conservative business model, the company is poised to continue returning value to shareholders for decades to come. However, investors should keep an eye on its balance sheet to make sure that management doesn’t excessively ramp up spending or make an acquisition at the expense of the company’s financial health.