With a record year for equities in the rearview mirror, investors wonder whether 2024 can bring more of the same. Many will look to protect the gains they made by seeking investments that smooth out volatility. Often, that means investing in dividend stocks.
History shows dividend stocks beat out their non-paying siblings by a wide margin over time, and they do so with less risk. Yet, during periods of turmoil, many stocks will cut or even suspend their dividend. What investors need are attractive high-yield stocks with sustainable dividends. Companies that pay dividends tend to be profitable and have been market-tested across various conditions. Those that come through intact tend to bear the mark of quality. What follows are three ultra-high-yield stocks with sustainable dividends for a reliable income stream.
British American Tobacco (BTI)
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Global tobacco stock British American Tobacco (NYSE:BTI) pays a dividend that yields 9.49% annually. Although such a high yield might indicate issues with the business, the cigarette giant has paid a dividend since 2007 and raised it every year thereafter. It’s a stable source of revenue despite industry headwinds.
Smoking rates, of course, are in a secular decline. But like the rest of the tobacco industry, British American is transitioning to more reduced-risk products such as electronic cigarettes and oral nicotine and tobacco products. Its Vuse brand is the biggest e-cig brand on the market. It overtook Juul and continues to pad its lead. The latest Nielsen data shows Vuse has a 42.1% share as of Nov. 2023, up from 41.8%. No. 2 brand Juul stayed flat at 24.4%. At its height, Juul owned three-quarters of the market.
However, British American faces regulatory headwinds. The Biden administration moved to ban the top-selling Vuse menthol e-cig in October 2023 and wants to ban menthol-flavored cigarettes. BTI’s Newport brand is the biggest-selling menthol cigarette, with a 66% share of the market. Any ban sought will also take years to come to fruition and would have to survive legal challenges. A federal appeals court already blocked enforcement of the FDA’s Vuse ban. There’s a good chance BTI will succeed as other companies have won their appeals of similarly capricious regulatory overreach.
In the meantime, BTI is expanding its smoke-free portfolio, and its dividend is secure. It has a payout ratio of 59%, which means it retains enough earnings to reinvest in its business to maintain and increase the dividend further.
Sociedad Quimica y Minera de Chile (SQM)
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Although electric vehicle (EV) growth is slowing, it’s still growing. That benefits Sociedad Quimica y Minera de Chile (NYSE:SQM), one of the world’s biggest lithium miners. The metal represents three-quarters of SQM’s revenue.
However, third-quarter results were marred by lower average lithium prices. Sales fell 38% compared to Wall Street’s forecast of a 36% decline, while profits were more than cut in half. Showing the ongoing demand for lithium, used in more industries than just automotive, volume increased by 4% to 43,300 metric tons, a quarterly record.
While management expects demand to continue growing, CEO Ricardo Ramos said ongoing pressure “could continue to have a negative impact on lithium prices in the short term.” Pricing dragged down SQM’s stock too. Even as it bounced off the summer lows, the stock was down 22% in 2023. That made the miner’s valuation much more reasonable, as it goes for just five times earnings and a fraction of sales. For a company with a strong balance sheet like SQM, that represents an opportunity.
What the weak lithium pricing won’t affect is its dividend. SQM made its first payout 30 years ago and has steadily increased the amount. Today, it yields 8.27% annually. It also produces plenty of free cash flow to cover the dividend payment.
And because SQM is more than just a lithium miner, it has other avenues of growth, too. The fertilizer segment took a hit from inflation, but management expects that to recover this year. That gives investors the promise of a bright future for both businesses despite cyclical weakness.
Clearway Energy (CWEN, CWEN-A)
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Clean energy developer and operator Clearway Energy (NYSE:CWEN, NYSE:CWEN-A) operates over 5,500 net megawatts (MW) of wind and solar power facilities across the country. It also has 2,500 net MW of natural gas generation plants. It is one of the largest providers of renewable energy in the U.S. and produces reliable and stable cash flows to support its dividend.
Clearway’s dividend currently yields 5.8%, and it targets growth between 5% and 8% annually. The preferred class A non-voting stock currently yields slightly higher at 6.2%. It raised its payout for 14 consecutive quarters and increased the payout by 8% in 2023. The company expects the dividend to rise 7% in 2024. Because Clearway has such clarity into its cash flows, it’s already funded the dividends through 2026. And after selling off its thermal business last year, it allocated the proceeds towards better-yielding renewable energy projects over the next few years. Its newest investments are already expected to contribute $15 million in cash available for distribution (CAFD) this year.
Both classes of stock are down about 15% over the past year. They offer investors a discount on entry into one of the top renewables companies that can grow dividends for years to come.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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