Dividend stocks generally make great investments. They supply investors with regular passive income. And for investors trying to boost a portfolio, dividend stocks have historically produced higher total returns than non-payers.
Dividend stocks are also diverse in terms of what companies offer them and there is a variety of them to consider. Three favorites among a few Fool.com contributors (mostly due to their higher yields) are A. O. Smith (NYSE: AOS), Crestwood Equity Partners (NYSE: CEQP), and Enterprise Products Partners (NYSE: EPD).
Here’s why these writers believe these three high-yield stocks are great buys to start 2023.
1. High, historically speaking
Reuben Gregg Brewer (A. O. Smith): Water heater maker A. O. Smith’s business has been in growth mode for over a decade. Part of the reason for that is expansion internationally. A growing market for A. O. Smith is China’s vast population, which is moving up the socioeconomic ladder. China accounts for most of its foreign sales and about 30% of its overall revenue. A headwind at the moment relates to the COVID-19 pandemic and the fact that cases in China remain high. Another emerging headwind involves the company’s North American operations, which saw some limited customer inventory reductions.
The stock is down around 25% over the past year, pushing the dividend yield up to 2.1%. That’s not high on an absolute basis, but it is near the highest levels for this industrial company in at least a decade. This suggests that the stock is trading at a relatively cheap price. Oh, and A. O. Smith’s dividend has increased annually for 30 consecutive years with a huge 15% annualized increase in each of the past five years. This relatively high-yielding stock is worth a look for growth and income investors.
It’s worth a look because A. O. Smith’s results are likely to improve. Replacement sales make up the majority of its North American business and should recover once the inventory issues are over. In China, sales have improved materially since 2020 with margins staging a nice rebound. The business will likely muddle through just fine. Longer term, A. O. Smith plans to aggressively expand in India, another up-and-coming market (third quarter 2022 sales in India rose 16%). Act now before other investors catch on to the positives and drive the yield lower again.
2. Cashing in on its recent investments
Matt DiLallo (Crestwood Equity Partners): 2022 was a transitional year for Crestwood Equity Partners. The energy master limited partnership (MLP) completed a series of transactions to sharpen its focus on its core operating areas surrounding the processing, storage, and transport of oil and natural gas.
The company closed its acquisition of Oasis Midstream to bolster its position in the Williston Basin. Meanwhile, it acquired Sendero Midstream and its partner’s interest in a joint venture to enhance its operations in the Delaware Basin. Finally, the company sold its assets in the Marcellus and Barnett regions to increase its focus on its core and help fund its other transactions.
All this wheeling and dealing should boost its earnings and cash flow in 2023. On top of that, the company anticipates its capital spending will decline as it finishes its current slate of expansion projects. These two drivers have Crestwood expecting “to generate meaningful and growing free cash flow in 2023 and beyond,” according to comments by CEO Robert Phillips in the third-quarter earnings release. That will give it the funds to further strengthen its balance sheet and grow value for unit holders.
Crestwood expects to generate enough excess cash after paying its current distribution (which yields 9.5%) to drive its leverage down toward its long-term target of 3.5 times by the end of this year. That would be an improvement from its roughly 4 times leverage level at the end of 2022. It would give the company even more flexibility to increase its payout, which it raised by 5% last year after closing the Oasis deal.
With the energy company’s big-time payout growing increasingly sustainable over the past year, it looks like an attractive investment for investors seeking passive income in 2023.
3. Dependable, growing dividends
Neha Chamaria (Enterprise Products Partners): While it’s hard to predict where oil prices will head in 2023, one prediction investors wouldn’t go wrong with is Enterprise Products Partners paying out a bigger dividend this year. This oil and gas stock has increased dividends every year for 24 consecutive years including the years of financial crisis and oil price collapses, so there’s no reason to believe it won’t initiate a dividend raise in 2023.
In fact, Enterprise Products generated record distributable cash flows (DCF) per share in the past 12 months that easily covered its dividend payout. In the third quarter, its DCF rose 16% year over year, and the company increased its dividend by 5.6%. It still had enough DCF left to repay debt, buy back shares, and most importantly, invest in growth. It is the latter that should drive Enterprise Products’ cash flows and dividends in 2023 as well.
Its acquisition of Navitas Midstream in early 2022 should continue to boost Enterprise Products’ production while it advances the $5.5 billion worth of organic projects currently under construction. In Q3, Enterprise Products’ pipelines transported record volumes of crude oil, natural gas, natural gas liquids, refined products, and petrochemicals; and the trend could continue given that these are recurring services under long-term contracts. That also means Enterprise Products’ cash flows should keep growing, and so should returns to shareholders in the form of dividends.
Given its dividend history, current cash-flow profile, and growth plans, the solid 7.7%-yielding Enterprise Products looks like the ultimate high-yield stock for 2023.
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Matthew DiLallo has positions in Crestwood Equity Partners and Enterprise Products Partners. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends A. O. Smith and Enterprise Products Partners. The Motley Fool has a disclosure policy.