The S&P 500 has been in rally mode over the past year. It's up about 25% in the last 12 months, with half those gains coming in 2024. That rally is making it more difficult to find compelling dividend stocks to buy, since dividend yields fall as stock prices rise.
The good news is that there are still some great dividend buys even as the S&P 500 rallies. Three Fool.com contributors have identified Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), Brookfield Infrastructure(NYSE: BIPC)(NYSE: BIP), and Clearway Energy(NYSE: CWEN)(NYSE: CWEN.A) as great dividend investment options right now. Here's why they think income-focused investors should consider adding them to their portfolios.
Is Schwab U.S. Dividend Equity ETF the total dividend package?
Reuben Gregg Brewer (Schwab U.S. Dividend Equity ETF): The S&P 500 index is yielding a miserly 1.3% or so today thanks to the bull market. You can get an around 3.4% yield from Schwab U.S. Dividend Equity ETF. While 3.4% may not be a huge income stream on an absolute basis, it is well more than twice the yield of the S&P 500 and, more importantly, it comes from a mix of highly vetted dividend stocks.
Schwab U.S. Dividend Equity ETF first looks for stocks that have increased their dividend for at least a decade (eliminating real estate investment trusts, or REITs, from consideration). It then creates a composite score that looks at cash flow to total debt, return on equity, dividend yield, and the five-year dividend growth rate. In this way, it attempts to balance yield, quality, and dividend growth in the selection process. The 100 top ranked stocks are put into the exchange traded fund (ETF).
As an investor, you get a high-quality list of dividend stocks with one easy purchase. The list is updated regularly so you don't have to do the work. And while the yield isn't as high as you might get if you cherry-picked individual stocks, it is still attractive.
You get all of that for an expense ratio of just 0.06%, which is very cheap. And the portfolio is surprisingly well diversified, too, with financials at 17% of assets, healthcare 15%, consumer staples 13%, industrials 13%, energy 12%, consumer discretionary 10%, and technology 8% (no other sector is above 5%).
If you like to keep things simple, Schwab U.S. Dividend Equity ETF is a very attractive dividend option even as the S&P sits near historic highs.
It didn't get the memo (yet)
Matt DiLallo (Brookfield Infrastructure): Brookfield Infrastructure's performance over the past year has been quite puzzling. The global infrastructure giant's share price has fallen nearly 30% despite a massive 25% rally in the S&P 500. That sell-off has driven its dividend yield up to near 6%.
Brookfield's stock has slumped even though its underlying business has performed quite well. Its funds from operations (FFO) have increased 11% over the past year. The company delivered 7% organic growth, powered by inflation-linked rate increases and over $1 billion of recently completed capital projects. Meanwhile, its capital recycling strategy has helped fund over $2 billion of accretive new investments that have driven its FFO growth rate into the double digits.
The company expects to grow its FFO by more than 10% this year from last year's level of $2.95 per share. This implies that it should produce at least $3.25 per share of FFO this year. With the decline in its shares pushing the price down below $34 apiece, Brookfield Infrastructure traded at about 10.5 times its forward earnings. That's a roughly 50% discount to the broader market (the S&P 500's forward P/E ratio is 21.7 times). Brookfield's dirt cheap valuation is a big reason why it offers such a high dividend yield.
Brookfield expects to increase its already high-yielding dividend by 5% to 9% annually. That pace aligns with its organic growth rate target of 6% to 9% per year. It expects acquisitions to continue driving its FFO growth rate into the double digits.
Brookfield Infrastructure offers a steadily growing dividend (this year marked its 15th consecutive year of increasing its dividend) and a strong upside potential due to its valuation gap and earnings growth rate. When these factors combine, the company has the potential to generate robust total returns.
This high-powered dividend should continue rising
Neha Chamaria(Clearway Energy): The S&P 500 might be hitting all-time highs, but some stocks aren't getting the attention they deserve. Consider this: A stock in a high-potential industry offering regular dividend growth and a yield of 6.7% is still down about 16% in the past year, as of this writing. That's Clearway Energy, one dividend stock you'll want to buy now.
Clearway Energy is one of the largest players in the U.S. renewable energy industry, positioning it well to exploit opportunities as the nation transitions from fossil fuels to clean energy. The company sells power under long-term contracts that generate steady cash flows, part of which is returned to shareholders in the form of regular and growing dividends.
Clearway Energy is targeting annual dividend growth of 5% to 8% through 2026 and recently said it expects to achieve the "upper range" of its guidance without needing any external capital. That's partly because the company sold off its thermal assets a couple of years ago and is still using part of the proceeds to fund new investments . Of course, it is also generating stable cash flows under long-term contracts and has a development pipeline, all of which should back its targeted dividend growth goals.
Clearway Energy is, in fact, already looking at growth opportunities beyond 2026, which means investors are likely to rake in larger dividends year after year beyond 2026 from this renewable energy stock. That, combined with the stock's high yield, makes it an appealing bet for the long term.
Should you invest $1,000 in Schwab U.S. Dividend Equity ETF right now?
Before you buy stock in Schwab U.S. Dividend Equity ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Schwab U.S. Dividend Equity ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $808,105!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of June 10, 2024
Matt DiLallo has positions in Brookfield Infrastructure Corporation, Brookfield Infrastructure Partners, and Clearway Energy. 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 Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.
