ABX:CC - Yields Up To 12%: 5 Top Dividend Stocks For December 2023

2023-12-22 03:00:00 ET

Summary

• The market narrative is shifting from "higher for longer" to rate cuts.
• We share a widely diversified set of five deeply undervalued dividend stocks that we think will benefit from this shift.
• Each of these stocks trades at an attractive valuation, offers an attractive yield, and should weather a recession well.

In December 2023, the U.S. economy is facing growing concerns of a recession hitting next year. Although the economy was robust earlier this year - initially leading the market to expect higher interest rates for longer - it is starting to show signs of cooling down and with it, inflation numbers and interest rate expectations are falling. Consumer spending is slowing, suggesting a more cautious sentiment from households, and the job market, while still strong, is seeing a gradual decline in job availability. Moreover, inflation has dropped substantially and - in recent months - is running at an annualized rate that is very close to the Fed's long-term 2% target.

As a result, there is a growing expectation that the Federal Reserve may reduce interest rates in the first half and possibly even the first quarter of next year. This macroeconomic background presents an exceptional opportunity for investors to consider dividend stocks like Energy Transfer LP (ET), Barrick Gold Corporation ( GOLD ), W. P. Carey Inc. (WPC), Nutrien Ltd. (NTR), and NextEra Energy Partners, LP (NEP), which offer an attractive combination of value, income, potential stability and growth prospects in a time of economic uncertainty and shifting monetary policies.

1. Energy Transfer Stock

ET is a leading energy midstream company that has a vast network of midstream infrastructure assets throughout the United States. They currently generate approximately 90% of their EBITDA from fixed-fee and/or take-or-pay contracted assets. This effectively shields them from commodity price fluctuations and enables them to generate fairly stable cash flows across the energy market and macroeconomic cycles.

Moreover, they have recently made several accretive acquisitions and have consistently invested in growth projects, giving them a substantial growth runway. Additionally, ET has recently taken significant steps to reduce its high leverage ratios - thereby preserving its investment-grade credit rating and even earning an upgrade from BBB- to BBB. Moving forward, management has a stated goal to reduce its leverage even further to below its current target range.

With a 9.3% NTM distribution yield that is covered by ~1.9x with distributable cash flow and an EV/EBITDA multiple that is well below its five-year average as well as that of its peers, ET appears to be undervalued. When combined with its defensive business model, solid balance sheet , and decent long-term growth prospects, ET appears well-positioned to deliver attractive risk-adjusted total returns and current income for investors even if we face a recession next year.

2. Barrick Gold Stock

GOLD is a leading global mining company that has underperformed both gold (GLD) and the broader gold mining sector (GDX) historically:

However, its future prospects look promising due to a significantly strengthened balance sheet , a strategic shift towards copper, and a positive outlook for gold prices.

GOLD's efforts to reduce debt and divest non-core assets have resulted in a lower risk profile and increased operational flexibility. Moreover, the company's increasing focus on copper production aligns with a bullish outlook for copper prices in the coming years due to the massive ongoing electrification trend, which further enhances GOLD's growth potential.

Additionally, various factors, such as central bank purchases, geopolitical tensions, and the likely end of Federal Reserve rate hikes, suggest a positive outlook for gold prices.

With GOLD's shares currently trading at a steep discount to blue-chip mining peers like Agnico Eagle Mines (AEM) on a P/NAV, P/E, and EV/EBITDA basis, we think it is a very attractive way to gain leveraged exposure to gold and copper right now.

3. W.P. Carey Stock

WPC is in the process of completing its strategic transition away from office real estate by disposing of its office properties in an accelerated manner in order to maximize its focus on growing its already substantial industrial and warehouse asset portfolio.

Between its strong same-store sales growth and majority exposure to office and warehouse properties, WPC is positioned for a potential valuation re-rating by the market to trade at a valuation that aligns more closely with industrial REITs rather than with diversified and retail-heavy triple net lease REITs.

Despite a recent dividend reduction associated with its office spinoff, WPC's ongoing transformation, relatively discounted valuation, BBB+ credit rating, and strong performance in a highly inflationary environment make it an attractive investment option.

Some risks to keep an eye on are some of its upcoming lease expirations (i.e., its largest tenant U-Haul in particular) as well as its large amount of debt maturities in the face of interest rates that will almost assuredly be meaningfully higher on the refinanced loans than they are on that debt currently.

That being said, WPC is overall well positioned to deliver attractive long-term total returns. It's very defensively positioned business model and tendency to be favored by the market during periods of falling interest rates should set it up for success in 2024 as the Fed's expected rate cuts and an anticipated economic slowdown impact market sentiment.

4. Nutrien Stock

NTR is a compelling investment opportunity given that it is the world's leading crop nutrient company with significant competitive advantages. Despite not having the highest dividend yield at just ~4%, NTR's robust growth strategy, aggressive stock buybacks, and stock price trading near its 52-week lows position it well to deliver attractive long-term total returns. The company's integrated business model across retail, potash, nitrogen, and phosphate segments provides diversification and more stability to its earnings relative to the volatility of each of its crop nutrient businesses, with a particularly strong foothold in potash and nitrogen due to cost advantages.

NTR's capital allocation strategy further strengthens its case, with a focus on enhancing its competitive positioning through cost reduction and production capacity increases, as well as smart acquisitions and advancements in digital infrastructure. The company's solid balance sheet with a BBB credit rating from S&P and aggressive shareholder returns through dividends and buybacks make for an attractive investment, especially in light of its projected double-digit capital return yield on the current stock price over the long term.

However, volatility in fertilizer prices remains a risk, influenced by a variety of unpredictable factors. Nonetheless, NTR's diversified income streams, strong free cash flow generation, and macroeconomic factors working in the industry's favor mitigate these risks substantially. The company's valuation metrics suggest that NTR is undervalued compared to historical averages, making it an even more attractive buy with a strong long-term outlook. Analysts expect steady dividend growth that should outpace inflation, which, coupled with the company's focus on efficiency, strategic expansion, and share buybacks, points to a strong long-term total return performance.

Given the attractive capital return yield, expected dividend growth, strong business fundamentals amidst industry volatility, and diversification benefits for our portfolio, NTR is a very attractive investment right now.

5. NextEra Energy Partners Stock

NEP is a subsidiary and financing vehicle for A-rated NextEra Energy ( NEE ), giving it vital support from a strong parent company. NEP is focused on renewable energy, especially wind and solar power, and owns one of the largest wind power fleets in the world. Recently, NEE suspended NEP's IDR obligations to give NEP more financial flexibility in the face of rising capital costs and needs and to preserve its distribution.

That being said, as we recently detailed , despite help from NEE, slashing its distribution growth trajectory in half, selling its STX pipelines to Kinder Morgan (KMI) for a decent price, and refinancing much of its debt coming due next year, NEP still has a lot of work ahead of it. It must execute successfully on a large repowering pipeline, maintain its distribution against relatively tight coverage (a 90%+ projected CAFD payout ratio over the next several years), sell its Mead Pipeline, and likely put together sufficient funds to complete another dropdown at some point in 2024 or 2025 to keep its distribution intact and fully redeem its maturing CPEFs and convertibles, much less achieve its 5-8% projected distribution CAGR through 2026.

However, there is a viable path to accomplishing this plan, and management has already accomplished a lot of the hard work, as we have already discussed. Moreover, its valuation is highly compelling right now, with a ~12% NTM distribution yield, a meager 7.3x Price-to-AFFO ratio, and a 9.81x EV/EBITDA multiple that is well below its own historical averages as well as those of many of its peers. As a result, while it is a high-risk bet, it also offers tremendous upside potential in a macroeconomic environment that should become increasingly favorable given that it has a defensive business model (highly contracted cash flows with lengthy terms and a BBB+ weighted average counterparty) and will benefit tremendously from falling interest rates.

Investor Takeaway

With the macroeconomic narrative shifting from a robust economy and "higher for longer" interest rates narrative to one of a slowing economy and likely Federal Reserve rate cuts in early 2024, defensive stocks that generate stable cash flows, such as ET, WPC, and NEP, as well as materials stocks that should benefit from falling interest rates like NTR and GOLD, are poised to benefit in the days, weeks, and months ahead. The fact that they are undervalued and offer attractive dividend yields makes them even more attractive.

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