We recently compiled a list of the 10 Very High Yield Dividend Stocks With Upside Potential. In this article, we are going to take a look at where NextEra Energy Partners, LP (NYSE:NEP) stands against the other stocks with over 8% dividend yield.
High yields have always sparked debate between analysts and investors. Analysts typically advise caution with extremely high yields, while investors often find them attractive. Analysts’ concerns are valid; high yields can sometimes be warning signs of financial instability within a company. Many companies offering exceptionally high yields have been on the brink of cutting or suspending their dividends. That said, no company is completely out of the woods regarding its challenges, and dividend yield plays a minor role in a company’s financial difficulties. In fact, many reports have highlighted that high-yield stocks have performed well over the years.
Newton Investment Management published a report revealing that high-yield dividend stocks outperformed the broader market during high inflationary periods from 1940 to 2021. The report also showed that investment portfolios with high-yield dividend stocks outperformed those with low or no dividend stocks in terms of value-weighted performance. High-yield portfolios outpaced low-yield ones by 199 basis points and zero-yield portfolios by 330 basis points. This outcome is informative, yet it does not provide insights into the market conditions of that time, offering only a general overview of high-yield stock performance. Analysts have been particularly attentive to how dividend stocks perform during periods of market volatility, recognizing that the demand for regular income is most keenly felt during these times. Therefore, analysts recommend considering stocks with high yields only if these companies also demonstrate strong dividend growth streaks.
The S&P High Yield Dividend Aristocrat Index seeks to track the performance of companies with at least 20 consecutive years of dividend growth with an average dividend yield of 3%. According to a report by S&P Dow Jones Indices, in a backdrop of slowing growth but rising inflation, the index achieved a monthly average total return of 0.39% from 1999 through April 2024, surpassing the benchmark by approximately 120 basis points. Historically, inflationary environments have typically benefited short-duration stocks like Dividend Aristocrat companies. During slow growth phases with declining inflation, the performance of the High Yield Dividend Aristocrats has aligned closely with the benchmark. The report further mentioned that the dividend growth rate for the index also surpassed inflation over the long term.
As mentioned above, when investing in dividend stocks, high yield and dividend growth must go hand in hand, as many companies have shown that it is indeed possible. Analysts typically view yields between 3% to 7% as healthy. The health of dividend stocks is often assessed based on their ability to generate cash flow and their track record of dividend growth. Investors favor stocks that not only offer high yields but also maintain or steadily increase their dividend payouts, rather than frequently cutting them. Examples include some of the best dividend stocks such as Altria Group, Inc., Verizon Communications Inc., and British American Tobacco p.l.c. that have above-average dividend yields coupled with robust dividend growth histories. To read more about strong dividend payers, have a look at Best Blue Chip Dividend Stocks To Buy.
Our Methodology:
For this list, we screened for dividend stocks with yields higher than 8% as of July 8. Then, we narrowed down the choices by finding stocks with an upside potential according to analyst predictions. Finally, we selected companies with the most hedge fund investors holding stakes in them, using Insider Monkey’s Q1 2024 database. The stocks are ranked in ascending order of hedge fund investors having stakes in them. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A wind turbine silhouetted against an idyllic sunset, representing clean energy projects.
NextEra Energy Partners, LP (NYSE:NEP)
Number of Hedge Fund Holders: 18
Dividend Yield as of July 8: 13.49%
NextEra Energy Partners, LP (NYSE:NEP) is an American master limited partnership (MLP) that mainly focuses on the acquisition of clean energy projects. Currently, the stock is in hot waters due to concerns over a potential dividend cut. Earlier, the company pointed to funding constraints caused by high interest rates and reduced its dividend growth goal by nearly half through 2026, setting it at 5% to 8% per year, with an annual target of 6%. The stock is down by over 13% since the start of 2024.
Though NextEra Energy Partners, LP (NYSE:NEP) has been offering generous dividends to shareholders over the years, the company’s business model is sensitive to high interest rates. Being an MLP, when concerns about interest rates or the economy arise and the stock price drops, the company loses the ability to issue new stock to fund growth. This can result in significant cuts to dividends. That said, the company profits by acquiring renewable energy assets from its parent company through drop-down transactions. Selling these clean energy assets allows the company to diversify its portfolio and pursue growth opportunities. This strategy enhances the company’s free cash flow, allowing it to provide positive forecasts for its distribution per unit in the future. In the first quarter of 2024, the company’s cash available for distribution came in at $164 million, up from $156 million in the same period last year.
While the future of NextEra Energy Partners, LP (NYSE:NEP)’s dividend remains uncertain, the company has consistently raised its payouts every quarter since 2015, which makes it one of the best dividend stocks with over 8% yield. The company pays a quarterly dividend of $0.8925 per share and has a dividend yield of 13.49%, as of July 8.
At the end of Q1 2024, 18 hedge funds tracked by Insider Monkey reported having stakes in NextEra Energy Partners, LP (NYSE:NEP), the same as in the previous quarter. These stakes have a consolidated value of over $148.7 million.
Overall NEP ranks 10th on our list of the best high yield dividend stocks with upside potential. You can visit 10 Very High Yield Dividend Stocks With Upside Potential to see the other high yield dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of NEP as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than NEP but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.
Disclosure: None. This article is originally published at Insider Monkey.
