High-dividend yield stocks are always attractive for investors who prefer regular cash flows. The focus is on steady upside and dividend income than quick gains that are seen in growth stocks. However, there are situations or times whereblue-chip dividend stocks tend to outperform growth stocks. The reasons can be a big industry or company specificcatalyst.
Further, there can be a case where a high-dividend yield stock trades at a significant valuation gap and surges higher. The focus of this column is on high-dividend yield stocks under $20 that can deliver 100% returns before the end of next year.
The stocks discussed represent companies with strong fundamentals. The valuation gap is therefore due to temporary headwinds. Once sentiments reverse, these blue-chip names can rally like growth stocks. Let’s discuss the business specific reasons for being bullish on these high-dividend yield ideas.
Aker BP ASA (AKRBF)
Aker BP ASA (OTCMKTS:AKRBF) is an undervalued oil & gas exploration company with a robust dividend yield. With crude under pressure, AKRBF stock has remained sideways in the last 12 months. I expect a strong breakout for this 9.97% dividend yield stock.
The first catalyst for a big rally is potential rate cuts due in the next 12 to 18 months. Expansionary monetary policies are positive for risky asset classes like commodities and energy. Further, easy money will support GDP growth and the demand for oil is likely to improve.
Specific to the company, I am bullish on the cash flow potential. Aker BP has low breakeven assets and as oil trends higher, free cash flows will swell. The oil & gas company already has an investment-grade balance sheet with a leverage ratio of 0.2.
Robust free cash flows would imply aggressive capital investments coupled with higher dividends. I must add that Aker has grown in the past through attractive acquisitions. With a liquidity buffer of $6.6 billion and a strong balance sheet, further acquisitions in the Norwegian Continental Shelf seem likely.
Vale (VALE)
In my view, Vale (NYSE:VALE) is a good contrarian play. VALE stock has been depressed and trades at a forward P/E of 5.26. Further, a dividend yield of above 11% is attractive and sustainable considering the cash flow potential.
Industrial commodities have been struggling with global growth concerns. That’s a key reason for VALE stock remaining sideways to lower. However, global expansionary policies are on the cards and I expect a good rally for commodities in the next 12 months. Vale is a potential beneficiary, and the stock can break out from deeply oversold levels.
From a business perspective, Vale has reported operational stability in the iron ore business. Production for Q1 2024 reached the highest level since 2019. The commodity major also reported healthy production growth in the copper and nickel segments.
Even with relatively depressed commodity prices, Vale reported adjusted EBITDA of $3.5 billion for Q1. If commodities trend higher, the company will be positioned to deliver an annual EBITDA of $18 to $20 billion. Therefore, with robust cash flow potential, Vale is attractive at current levels.
AT&T (T)
AT&T (NYSE:T) has remained subdued for an extended period. To put things into perspective, T stock has declined by 27% in the last five years. It however seems that the communication services stock has bottomed. Valuations look attractive at a forward P/E of 8 and T stock offers a dividend yield of 6.29%.
From a business and financial perspective, there are two key positives. First, AT&T has invested $140 billion in the U.S. wireless and wireline network between 2018 and 2022. These investments are delivering sustained subscriber base growth. At the same time, the average revenue per user has increased.
Further, AT&T has remained on track to achieve its financial goals. The company has reaffirmed its guidance of net debt-to-adjusted EBITDA of 2.5x by 2025. For the current year, AT&T has guided for free cash flow of $17 to $18 billion. Healthy cash flows will ensure steady dividends and the headroom to deleverage.
On the date of publication, Faisal Humayun 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.
