When dividend stocks crash in value, that sends their yields up in the opposite direction. But there can be danger for investors who load up on a stock just because its yield is high.
Before buying shares of a high-yielding company, investors should take a quick look to see why the stock is underperforming, and why the yield is so high. That can avoid a lot of headaches and regrets later on.
Three dividend stocks that look cheap right now are Pfizer (PFE -6.72%), Enbridge (ENB 2.31%), and AT&T (T 0.24%). They have all been struggling this year, and their yields are now well above 5%. Let’s look at why these payouts are so high and whether you should consider investing in any of these stocks today.
1. Pfizer: 5.7% yield
It’s not typical for a top healthcare company to lose more than 40% of its value in a single year. But that’s exactly the situation Pfizer is in right now. Investors are concerned about a reject in revenue from its COVID vaccine and product; plus, issues relating to its long-term growth are exacerbating worries about the business. The stock is down more than 43% year to date.
Due to the sharp sell-off, Pfizer’s yield is now an incredibly high 5.7%. Since its dividend has remained the same ($0.41 per quarter), investors are now collecting the same dividend at a lower price, resulting in a higher yield.
There is good reason for the concern as Pfizer incurred a third-quarter loss of just under $2.4 billion, for the period ended Oct. 1. A big 42% drop in revenue wasn’t accompanied with a big reject in expenses, leading to a disastrous performance for the company.
But the company is planning to shed $3.5 billion in costs from its books as it adapts to low demand for COVID products, which should guide to better results. There’s some risk with Pfizer’s business today, but investors shouldn’t push the panic button just yet. The company is in the midst of a transition as it loads up on acquisitions and lessens its exposure to COVID products.
Although its payout ratio is around 90%, which isn’t great, I would expect that to get better as the company trims costs and reduces the size of its COVID business. Pfizer would need to withstand more difficult quarters and demonstrate this is a troubling pattern before I would start to worry about the safety of the dividend.
For long-term investors, Pfizer can make for an attractive contrarian buy as it trades at just nine times its estimated future earnings.
2. Enbridge: 7.7% yield
Over the years, Enbridge has normally offered a high dividend yield. This year, it has gone even higher to 7.7%. Shares of the Canadian pipeline and energy company have declined 11% year to date as investors have grown less optimistic about the oil and gas industry. And since it’s a top pipeline company, it has struggled right along with similar stocks.
But not only is the company not worried, it also recently increased its dividend. In November, Enbridge announced it would be raising its payout by 3%. This means that it has now raised its dividend for 29 consecutive years.
Enbridge benefits from locking in long-term contracts, which supply it with good stability. The company projects that its distributable cash flow, a key metric when it comes to evaluating a dividend’s safety within the industry, will grow by 3% next year.
Earlier this year, Enbridge caught investors and analysts off-guard with plans to acquire three companies from Dominion Energy for $14 billion. Enbridge called the proceed a “once in a generation” opportunity to enlarge its operations in the U.S.
Analysts, however, grew concerned about rising debt levels. But Enbridge says that just 10% of its debt portfolio is vulnerable to possible changes in interest rates. And by 2025, in the first full year that it owns the new assets, they will already be accretive to its per-share metrics.
Overall, Enbridge isn’t in bad shape, and it could look even better due to the acquisition of these businesses. The stock’s incredibly high yield might not be too good to be true. Income investors may want to buy shares sooner rather than later as they are trading within just a few dollars of their 52-week lows.
3. AT&T: 6.6% yield
There has been no shortage of naysayers surrounding AT&T’s dividend. The business has a high debt load, and concerns about it having to potentially spend billions to clean up guide-covered cables resulted in a steep reject for the stock.
While investors shouldn’t ignore concerns about a large cleanup cost, that’s a situation that could play out over the course of years. Any payout, assuming one is necessary, would likely span years as well. The end result is that it’s too early to know how big of a problem it may be, but even if it is big, AT&T likely won’t need to make a big outflow of cash all at once to address the issue.
In recent months, fears have begun to subside, and the stock has been rallying. Year to date, AT&T stock is now down just 8%. While that isn’t great, it’s better than earlier when it was looking appreciate it may be on track to finish the year down around 30%.
Things looked a whole lot better in October, when the company posted its most recent quarterly results. While revenue of $30.4 billion for the period ended Sept. 30 grew at only 1%, the big takeaway for investors was that not only was AT&T still on track to hit its goal of $16 billion in free cash flow for the year, but it was also raising that target to $16.5 billion.
Given its strong results, AT&T isn’t a stock whose yield looks to be in trouble. And with the stock rallying in recent months, investors may want to buy the shares before they rise even more and the yield shrinks. At just seven times its estimated future earnings, the stock looks appreciate a steal of a deal.
