In the current interest rate environment, where yields on fixed-income investments hover around 5% or higher, income-seeking investors have many alternatives. They either go for fixed, government-backed securities and generate a safe return or potentially go for stocks. The issue with the latter is that with the “risk-free” rate at such high rates, a stock offers a much higher yield to justify taking on the extra risks attached.
A few years ago, when interest rates were just above 0%, it was quite common to buy stocks yielding between 2% and 3% for income. With U.S. bond yields at historic lows and Europe offering negative yields, a 2.5% yield on stocks seemed like a decent income option for many. Fast-forward to today, and the situation has flipped: investors now have access to 5% or more yields with effectively no risk.
Hence, to warrant assuming additional risk with income stocks, targeting those offering higher yields alongside significant growth potential is better. For this article, I have chosen three high-yield dividend stocks that not only feature significant yields of 6% or higher but also have the potential to grow investors’ income and see their share prices appreciate over time.
Vale (VALE)
The first high-yield stock on my list is Vale (NYSE:VALE). Based on production volume, it is the largest producer of iron ore in the world and, thus, a titan in the basic materials sector. Its shares have faced turbulent times recently, mainly due to political uncertainties in Brazil. With the Brazilian Government’s influence on the company due to its 12 Golden Shares, many investors fear that Vale’s generous dividend could come under attack.
Regarding Vale’s dividend, it’s worth noting that the company has a history of being quite generous with payouts, albeit with variable rates. Unlike typical dividend growth stocks that maintain regular quarterly payouts and incrementally increase dividends over time, Vale’s dividend payouts fluctuate wildly due to the volatile cycles of the iron ore market. Now, add to that the political risk, and you can see why shares trade at a sky-high yield of 15.7%, based on last year’s dividends.
Still, I believe Vale is a great high-yield at its current levels. I am not discounting the underlying risks attached. However, Vale remains a free cash flow machine. It generated a free cash flow of $7.52 billion last year, and even with the industry under heavy pressure this year, it will generate $4.83 billion in free cash flow in FY2024. Therefore, the dividend yield will likely stay in the double digits this year, even if a modest cut occurs.
Enbridge (ENB)
The second standout high-yield stock on this list is Enbridge (NYSE:ENB). It’s a giant in the Canadian energy infrastructure space and has a tremendous reputation as a dividend-paying stock. Specifically, despite its significant % dividend yield of 7.7%, Enbridge has an incredible dividend history. The company has increased its dividend every year for the past 29 years. This is quite the feat, given the highly volatile nature of the energy sector.
The company has been able to increase its dividend every year for nearly three decades because of the resiliency of its business model, which relies on long-term contracts and thus provides predictable cash flows. To underscore the critical importance of Enbridge’s asset base to the communities it serves, consider this: even during the severe industry downturn of 2020, when many energy firms incurred heavy losses, Enbridge remained profitable.
Moving forward, I would expect more of the same: a rich dividend yield, modest dividend growth in the single digits, and consistent profitability. Unlike Vale’s more unpredictable (even more massive) payouts, Enbridge is a Sleep-Well-At-Night stock you can truly depend on, with reliable, clockwork-like quarterly payouts. Along with the shares trading at a forward EV/EBITDA of about 10.7, one of the lowest multiples in two decades, I think Enbridge is a great high-yield stock at its current levels.
Crown Castle (CCI)
The last pick on my list is Crown Castle (NYSE:CCI), one of the largest telecom infrastructure providers in the United States. Due to the nature of cell towers as an asset class, Crown Castle is a Real Estate Investment Trust (REIT). It owns and runs over 40,000 cell towers and about 85,000 miles of fiber supporting small cells and fiber solutions.
Shares of Crown Castle have experienced a downward decline in recent years, as have most REITs. The rise of interest rates during this period has compressed REIT valuations and raised their yields. Hence, Crown Castle’s dividend yield now stands at 6.5%, which I find quite tempting given the company’s numerous qualities.
In particular, Crown Castle’s business model has various attractive attributes, including benefiting from long-term, recurring revenue contracts with major telecom giants like AT&T (NYSE:T), Verizon (NYSE:VZ) and T-Mobile (NASDAQ:TMUS).
Its towers are essential infrastructure for these telecom providers, which strive for reliable signal coverage. Thus, Crown Castle benefits from predictable cash flows with exceptional visibility. This makes the stock an excellent high-yield opportunity for investors seeking exposure to the real estate sector.
On the date of publication, Nikolaos Sismanis 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.
