With the Federal Reserve recently lowering interest rates, investors looking for income have to look beyond their savings accounts or ultra-safe bonds to find decent payments. Dividend stocks can often fill that role, but investors need to be careful as dividends are not guaranteed payments. Indeed, dividends can (and do) get cut if the going gets tough enough, and a dividend cut often takes the company's stock down with it.
To help you find companies with good dividends that look like they have staying power, we asked three Motley Fool contributors to share their picks for dividend stocks that looked like they would be worth buying this August. They selected Carnival (NYSE: CUK)(NYSE: CCL), ExxonMobil (NYSE: XOM), and Enbridge (NYSE: ENB). Here's why.
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Ride this Carnival instead
Rich Smith (Carnival): "What's in a name? That which we call a rose, by any other name, would smell as sweet." And, in fact, if the rose had a lower stock price and a higher dividend yield, it might smell even sweeter!
That's why today I'm going to suggest buying Carnival Corporation -- NYSE: CUK -- as a better alternative to buying Carnival Corporation -- NYSE: CCL.
Both ticker symbols represent basically the same thing -- a cruise line stock currently trading near 52-week lows after lowering guidance last month. One difference between them is that shares of Carnival/CCL confer an extra vote at shareholder meetings, that Carnival/CUK shares don't get. Otherwise, they're pretty much identical. Both "stocks" earned $3 billion over the past year, are pegged for about 10% earnings growth over the next five years, and pay a dividend north of 4% -- twice the market average.
And yet, Carnival/CCL shares cost more -- $45 and change, versus less than $44 for Carnival/CUK. And as a result, the $2-per-share dividend that both stocks pay works out to a 4.7% dividend yield for Carnival/CUK, versus only a 4.4% yield for Carnival/CCL.
If you like the idea of buying a cruise line stock for 10 times earnings, therefore, and love the idea of collecting twice the dividend yield of the average S&P 500 stock, it seems to me that buying Carnival/CUK instead of Carnival/CCL is an easy choice to make.
An energy giant with big yield and a growth potential
Keith Noonan (ExxonMobil): The market doesn't seem to be on board with ExxonMobil's growth push. Despite the oil and gas giant outlining a big drilling expansion plan that could more than double its free cash flow from 2017 to 2025, increase annual earnings by more than 140%, and see its daily oil production climb 37%, investor sentiment on the stock is running cold. Shares are down roughly 9% over the last year, 24% over the last five-year period, and have managed only meager mid-single-digit growth over the last decade.
Supply glut has depressed prices, and the market presumably doesn't like the company's big capital spending push to dramatically ramp up production when prices are already low and the potential for worsening macroeconomic conditions could further tamp down demand. In spite of some evidence for a potential global economic slowdown, which tends to mean less demand for oil, Exxon continues to look like a worthwhile stock for long-term investors seeking big dividends.
Energy markets are difficult to predict on a long-term timeline because such a wide range factors impact pricing, and it's possible that Exxon's big production expansion won't be the big catalyst it expects for that reason. However, the stock looks non-prohibitively valued trading at roughly 20.5 times this year's expected earnings and sports a chunky 4.7% dividend yield that's backed by a 36-year history of annual payout increases.
New discoveries and drilling projects in offshore Guyana and the Permian Basin will spur dramatic production increases for ExxonMobil, and combined with the company's big dividend, this growth push could prove very rewarding for shareholders.
Get paid even if energy prices stay low
Chuck Saletta (Enbridge): The energy business is one of the few where "Take or Pay" contracts are generally enforceable. Those types of contracts are leveraged by pipeline operators to secure the funding needed to build new pipelines, as they require the energy producers to pay for capacity whether they need it or not. That results in guaranteed cash flow for the pipeline operator unless the energy producer on the other side of the contract goes bankrupt.
Aside from those take or pay deals, many pipeline contracts are volume based. That means the pipeline operator gets paid based on how much energy is flowing through its control, regardless of the price that the end consumer pays for it. Taken together, take or pay and volume based contracts mean that pipeline operators often pay out strong dividends that reward their shareholders with cold, hard cash for owning that infrastructure.
Canadian pipeline giant Enbridge is no exception to that general rule. It currently sports a yield around 6.6%, and it actively hiked its dividend by 10% around the beginning of the year. That high yield and substantial increase notwithstanding, Enbridge's dividend remains well covered by the company's operating cash flows, meaning it will likely be able to keep up the trend of increasing that payment.
From an investor's perspective, Enbridge's shares have fallen over the past month, making now a decent time to consider investing. Note that as Enbridge is a Canadian company that pays its dividend in Canadian dollars, U.S.-based investors will see the dividend payments vary a bit due to exchange rate fluctuations. In addition, unless you own its shares in an IRA, your dividend will be subject to a Canadian withholding tax.
10 stocks we like better than ExxonMobil
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and ExxonMobil wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 1, 2019
Chuck Saletta owns shares of Enbridge. Keith Noonan has no position in any of the stocks mentioned. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.