BIP - Yields Up To 15%: 5 Top Dividend Stocks For November 2023

2023-11-17 09:05:00 ET

Summary

• With inflation seeming to finally be getting under control, interest rates at or near their peak, and recession odds rising, the markets are about to shift.
• We share a widely diversified set of five stocks that we think will benefit from this shift.
• Each of these stocks has investment-grade credit ratings, trades at attractive valuations, offer attractive yields, and should weather a recession fairly well.

The dominant macroeconomic themes in November are the growing consensus that inflation is under control, the Federal Reserve's interest rate hiking cycle is over, and a recession is increasingly likely to hit at some point next year. The S&P 500 ( SPY )( VOO ) and Nasdaq ( QQQ ) have seen a significant rise so far this year - driven largely by AI-related tech companies like Palantir ( PLTR ), NVIDIA ( NVDA ), and Microsoft ( MSFT ) - while more defensive and interest rate-sensitive sectors like utilities ( XLU ) and real estate ( VNQ ) have underperformed. However, we anticipate a major market shift in the near future that will bring defensive high-yielding stocks back into favor due to a declining economy and falling bond yields .

With this macroeconomic perspective in view, here are some of our top picks for November 2023:

#1. Realty Income Stock ( O )

O looks quite attractive right now given that its stock price has collapsed this year even as its underlying fundamentals remain quite strong. As a result, it appears that the market is penalizing it purely due to rising interest rates and not because of any concerns about O's underlying business or balance sheet strength.

For example, its occupancy rate of 98.8% illustrates that its tenants are doing quite well and its properties remain very economically valuable. With a diverse portfolio of 13,282 commercial properties and a roster of reputable tenants - many of whom are investment grade - O's real estate empire is as strong as ever and it continues to churn out cash flow and dividend growth.

O looks quite attractively priced right now as it currently trades at a 7% discount to analyst consensus estimates of NAV despite historically trading at a premium to NAV. Moreover, its dividend yield of 5.9% is about 150 basis points above its five-year average while its price-to-AFFO ratio of 13 stands at a steep discount to its five-year average of 18.1x.

The potential for a Federal Reserve pivot could very possibly send O's stock price soaring higher as its combination of strong fundamentals, recession resistance, and discounted valuation make it a very attractive place to be when inflation and interest rates are expected to fall and the economy is flirting with a recession.

#2. Enterprise Products Partners Stock ( EPD )

EPD stands out as a must-own investment in the current environment for several compelling reasons. First of all, EPD boasts a remarkable track record of distribution growth and long-term wealth creation for investors, significantly outperforming the S&P 500 and its own sector since going public.

Additionally, EPD has the strongest balance sheet in the midstream sector ( AMLP ), with an A- credit rating, a weighted average debt maturity term of 19 years, and 96% of its debt at fixed interest rates. Moreover, its leverage ratio of 3.0x is one of the lowest in the sector. As a result, EPD is well-positioned to capitalize on opportunities to create value for unitholders opportunistically, whether through M&A, buybacks, and/or organic growth investments.

Furthermore, EPD's business model generates very stable cash flows thanks to its long-term contracted pipeline and other midstream infrastructure assets, making it a suitable pick on the cusp of a potential economic downturn.

Last, but not least, its very well-covered 8% distribution yield combined with its ~5% distribution CAGR and relatively modest 9x EV/EBITDA valuation give it an attractive total return profile, especially for such a low-risk business model and balance sheet. Note that EPD issues a K-1 tax form.

#3. Brookfield Infrastructure Partners Stock ( BIP )( BIPC )

BIP offers investors unique access to a diversified portfolio of essential global infrastructure with exposure to sectors such as midstream, utilities, transportation, and data infrastructure. Its assets include things like pipelines, electrical and gas utilities, railroads, toll roads, ports, towers, and data centers. BIP's recent acquisition of Triton International ( TRTN ) - the world's largest shipping container company - further diversifies and strengthens its transportation segment while giving it access to another set of highly contracted and very stable cash flows from TRTN's long-term leases.

BIP's BBB+ credit rating illustrates the strength of its balance sheet, with the vast majority of its debt residing at the asset level with no recourse to the corporation and 90% of its debt being at fixed interest rates, with an average maturity of seven years, mitigating interest rate risk. Moreover, its cash flow profile is quite stable and recession-resistant thanks to its diversification across many sectors and geographies as well as the fact that 85% of its funds from operations (FFO) are inflation-protected or indexed, and 90% of its FFO comes from contracted or regulated sources with an 11-year average duration remaining on its contracts.

With a mid to high single-digit distribution CAGR outlook ahead of it, a lengthy growth runway due to its premium deal flow from its parent ( BAM )( BN ), and enormous tailwinds for the global infrastructure segment, its 5.8% distribution yield looks very attractive at the moment. While some have recently expressed some concerns about BIP in light of a recent short report on the company, we dispel the short thesis here . Note that BIP issues a K-1 tax form while BIPC - BIP's economic equivalent - issues a 1099 tax form.

#4. Newmont Corporation Stock ( NEM )

NEM presents a compelling buy opportunity, especially given the stock's abysmal performance year-to-date and the current economic climate. While Q3 results were slightly below expectations due to mine disruptions, leading to a 13% decrease in gold production and a rise in costs, the company's future outlook remains positive. The merger with Newcrest ( NCMGF ) promises to diversify and strengthen NEM's portfolio by adding lower-cost assets and significant copper production and positions Newmont as a premier diversified miner with substantial cash flow potential.

The stock's current valuation is in line with its Net Asset Value rather than at its historical 30% premium, suggesting an attractive entry point for shareholders, especially given the 4.4% NTM dividend yield. Furthermore, NEM's aggressive investments in autonomous technology should help offset some inflationary cost headwinds while its balance sheet remains in very strong shape, providing it stability and plenty of financial firepower to continue driving opportunistic growth and returning capital to shareholders.

Additionally, we think that NEM could experience a major tailwind from a strong outlook for gold ( GLD ) prices. Aggressive central bank buying, significant geopolitical unrest around the world, and macroeconomic tailwinds amid the expectation that the Federal Reserve is likely done raising interest rates could all combine to drive gold prices higher. In fact, historically, gold prices have surged after Fed rate hikes.

#5. FS KKR Capital Corp Stock ( FSK )

Last, but not least, FSK - one of the largest BDCs ( BIZD ) in the market today - presents investors with a compelling value opportunity. When taking into account expected special dividends on top of its hefty base dividend, FSK's NTM dividend yield is nearly 15% (14.7%) and it currently trades at a steep 20% discount to book value.

Between improved underwriting performance due to support from its partnership with a world-class alternative asset manager in KKR ( KKR ), its reasonable leverage ratio, considerable exposure to senior secured debt investments, sky-high dividend yield that is fully covered by net investment income, and its steep discount to NAV, FSK offers investors attractive risk-reward potential. Another thing we like about FSK is that it benefits from higher short-term interest rates, so in the event that the Federal Reserve does not cut rates soon, it can serve as a nice hedge against other picks on this list that will benefit immensely from interest rate cuts. Moreover, given the senior secured nature of its loans and its investment-grade credit rating, it should be able to weather a recession fairly well, though it should not be viewed as a recession-resistant investment. Given its huge margin of safety, though, even if a recession comes to fruition, FSK's long-term total return outlook remains very attractive.

Investor Takeaway

In a shifting economic landscape where inflation seems to be finally in decline, rate hikes appear to be done, and recession risks are rising, we think that a great place to invest right now is in undervalued defensively positioned, high-yield stocks. In O, EPD, BIP, NEM, and FSK, investors can access a widely diversified set of investments that all have investment-grade credit ratings, trade at attractive valuations, offer attractive yields, and should weather a recession fairly well.

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