A high yield isn’t the only thing you should consider when you are looking for a dividend stock. Maybe it’s what gets you to look at a stock, but you also want to make sure the business backing the lofty yield is worth owning. If you want high yields from good companies, you should examine Chevron (NYSE: CVX), United Parcel Service (NYSE: UPS), and Enbridge (NYSE: ENB) as November gets underway. Here’s why these three stocks are worth considering this month.
1. Chevron is the all-in-one energy play
Energy is vital to the global economy, and you should probably have some exposure to the sector. The problem is that oil and natural gas stocks are highly volatile, so picking a good energy-focused dividend stock really means picking an energy stock that can survive the full energy cycle while continuing to pay you your dividends.
Chevron has increased its dividend annually for 37 consecutive years. That’s impressive given that it operates in all of the important energy segments, including oil and gas production (upstream), energy transportation (midstream), and chemicals and refining (downstream).
Two of these three segments are highly cyclical (more on the more stable midstream sector in a moment). Indeed, Chevron has grown into one of the largest integrated energy companies on the planet despite frequent swings in commodity prices. It has proven that it is a survivor and one that can support its attractive 4.3% dividend yield even if oil prices plunge. Part of the reason is that it has an incredibly conservative balance sheet, with low leverage giving it the wherewithal to add debt during tough times to support its business and your dividends. If you want to add oil and gas to your portfolio in November, Chevron is a good way to do it.
2. UPS’ yield is near historic highs
United Parcel Service, more commonly known as UPS, is attractive because its lofty 4.8% dividend yield is near the highest levels in its history. Using yield as a rough gauge of valuation, the high yield suggests one of the largest delivery companies on the planet is very cheap as November gets going and the all-important holiday shipping period gets underway.
To be fair, there’s a reason for UPS’ high yield. It isn’t hitting on all cylinders today, with margins recently under pressure from rising wages on one side and lower profitability customers on the other.
Those headwinds are already starting to look like they are in the rear-view mirror, with strong volumes in its package business and a renewed focus on the most profitable customers. If UPS can get margins expanding again, investors are likely to afford the company a higher valuation. But the real story here is that UPS is one of a small number of large delivery companies in a world filled with people who increasingly buy online. Nothing moves in a straight line on Wall Street, but UPS seems to be gearing up to fly high again.
3. Enbridge is the boring way to play the energy transition
Canada’s Enbridge is offering investors a huge 6.5% dividend yield. Most of its business today is tied to transporting oil and natural gas through its massive North American midstream network (about 75% of earnings before interest, taxes, depreciation, and amortization). That’s a toll-taker business, and the most reliable of the three energy segments, so revenue tends to be fairly consistent through the energy cycle. That’s why the company can pay such a high yield.
For conservative income investors, Enbridge is a way to get energy exposure without having to worry as much about volatile commodity prices.
But there’s a subtle twist here. One of Enbridge’s big goals is to provide the world with the energy it needs, which today means increasingly investing in the regulated natural gas utility sector and in clean energy. Together these two business sectors make up 25% of the company’s business, up from 15% roughly a year ago.
All of Enbridge’s businesses tend to generate reliable cash flows, so the dividend isn’t at risk because of its shift. In fact, the addition of three regulated natural gas utilities to the portfolio has made cash flows even more reliable (and perhaps boring). Yes, the yield will make up most of an investor’s return here, but if you are trying to maximize the income you generate, that probably won’t upset you. And you can be comfortable that Enbridge isn’t fighting the clean energy trend, but is, in fact, trying to embrace it.
The yield is the icing, the business is the cake
You can easily find stocks with high yields in just about any market environment. But you don’t want to own just any old high-yield stock; you want to own companies that have the wherewithal to pay you your dividends through thick and thin. Chevron is built to handle energy sector volatility, UPS has a dominant industry position and an improving outlook, and Enbridge is working hard to ensure that the world has the power it needs while you get the dividends you want.
If you are looking for good high-yield stocks in November, start with this short list of attractive businesses.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Chevron and Enbridge. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.