Collecting dividends from stocks is a great way to participate in the market while still collecting passive income. Many companies use dividends as a way to pass along profits directly back to shareholders. And the best companies are able to grow their earnings and their dividend payouts over time.
Here's why Brookfield Renewable(NYSE: BEPC)(NYSE: BEP), Phillips 66(NYSE: PSX), and the Global X SuperDividend U.S. ETF(NYSEMKT: DIV) stand out as two top dividend stocks and a top exchange-traded fund to buy now.
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Brookfield Renewable's robust backlog suggests it's well positioned to extend its impressive streak of dividend raises
Scott Levine (Brookfield Renewable): The prospect of amplifying your passive income stream with a high-yielding dividend stock is undeniably alluring. Experienced investors know all too well, however, that those dreamlike opportunities can quickly fade into nightmare scenarios if the companies are not financially healthy and payouts are slashed to avoid financial ruin. Therefore, it's understandable that Brookfield Renewable would garner skepticism with its 5% forward dividend yield, but a closer look at the company's financials shows that this high-yielding stock is worth serious consideration.
From the Americas to Europe to Asia, Brookfield Renewable operates a sizable portfolio of renewable energy assets -- a portfolio that is consistently growing. Since 2020, for example, the company's portfolio has doubled in terms of generating capacity to about 37 gigawatts (GW), and it will presumably continue to grow at a steady clip in the near future, fueled by the 65 GW of advanced-stage projects in its pipeline. And because Brookfield Renewable's business model relies on inking long-term power purchase agreements with customers, this bodes well for supporting future dividend growth.
With respect to the dividend, management is targeting steady growth of 5% to 9% for the foreseeable future. And though the company's past performance doesn't ensure the same results in the coming years, it's worth acknowledging that it has amassed a strong record of increasingly rewarding shareholders. For more than 20 years, Brookfield Renewable has increased its distribution at a 6% compound annual growth rate.
Phillips 66 pours profits into its capital return program
Daniel Foelber (Phillips 66): Phillips 66 has been on a roller coaster over the last few years. In 2020, lower crude prices reduced costs for refiners, but because demand for products like jet fuel, gasoline, and diesel also fell, many refiners ended up booking losses that year. Refining stocks, including Philips 66, surged from 2021 till early 2024 as economic growth boosted product demand, sales increased, and margins improved. However, as you can see in the following chart, sales and margins have been declining recently. And lower margins usually correspond with a lower stock price for Phillips 66.
Phillips 66 looks like a great dividend-paying value stock to buy now. The company's strategy and capital allocation are based on mid-cycle targets, so it doesn't get caught up in short-term ebbs and flows in refining margins. Phillips 66 also has clearly defined capital return goals. Since Phillips 66 and ConocoPhillips separated in 2012, Phillips 66 has raised its dividend every year and repurchased a third of its outstanding share count. As of July 30 prices, Phillips was targeting a total shareholder distribution yield of 9.1% consisting of 3.1% from the dividend and 6% from share repurchases. The yield has gone up to 3.5% since then because the stock price has continued to slide. But the key takeaway is that Phillips 66 returns even more value to shareholders through buybacks than dividend payments.
Phillips 66 has been a fairly predictable company from a capital allocation perspective. It tends to pause or pull back on stock repurchases and capital expenditures when earnings come down, but it consistently rewards shareholders by raising the dividend regardless of market conditions. You can see this pattern play out in the following chart, which shows Phillips 66's stock buybacks and capital expenditures since the spinoff.
PSX Stock Buybacks (TTM) data by YCharts
All told, Phillips 66 is an excellent high-yield dividend stock because it can grow its dividend even during industrywide downturns.
A high-yield ETF that makes a monthly distribution
Lee Samaha(Global X SuperDividend U.S. ETF): Finding high-yield stocks isn't difficult, but finding high-yield stocks that can grow that dividend isn't as easy. There's often a reason why a stock trades on a high yield, and quite often, it's the market pricing in doubt that the dividend is sustainable.
As such, there's always a risk in unthinkingly following a high-yield investing strategy. That risk is reduced by buying an ETF like the Global X Super Dividend U.S. ETF, which aims to invest in a basket of 50 high-yield stocks on the U.S. market. That strategy helps diversify stock-specific risk.
That said, the strategy will tend to overweight specific market sectors, leading to sector-specific risk. For example, at the time of writing, four sectors make up more than 10% of the holdings in the ETF. Energy stocks comprise 20% of the ETF, with utilities a close second at 19.6%, real estate at 18.6%, and consumer staples at 10.9%. Consequently, this ETF is not for you if you aren't comfortable being overweight in these sectors.
On the other hand, the ETF pays a monthly distribution, and sectors with the highest yields are likely to change over time. As such, you can think of high-yield ETF investing as buying into unloved sectors in relatively mature industries. There's nothing wrong with that, and the financial discipline imposed on management committed to paying a sustainable dividend provides a stable foundation for generating shareholder value.
As such, many investors will find this ETF and its 6% dividend yield a worthwhile addition to a high-yield portfolio.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has positions in Brookfield Renewable. The Motley Fool has positions in and recommends Brookfield Renewable. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
