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3 Dividend Stocks That Now Yield More Than the 10-Year Treasury Rate

Motley Fool - Fri Nov 17, 2023

After reaching a near 20-year high of 5% in mid-October, the 10-year Treasury rate dipped back down to 4.5% on Tuesday as investors cheered the prospect that inflation might have peaked and the Federal Funds Rate hikes may be nearing an end.

This significant decline in the 10-year rate means that investors can now get a higher yield from dividend stocks like Duke Energy(NYSE: DUK), Dow, Inc.(NYSE: DOW), and BP(NYSE: BP) than they can from a 10-year Treasury note.

Here's why all three dividend stocks could be worth buying now.

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1. Duke Energy: A utility with a rock-solid dividend

Utilities like Duke Energy were hit hard by inflationary pressures. Regulated electric utilities, gas utilities, and water utilities enjoy steady cash flows from a reliable customer base. However, rising interest rates have made it more expensive to borrow money. If there's one common theme throughout the utility sector, it is that many companies rely on debt to fund new infrastructure projects and maintain or improve existing assets.

The utility sector sports a much higher yield than the S&P 500 overall, as many utility companies make up for their low stock price growth by rewarding shareholders with a growing dividend.

Even after Tuesday's broader market rally, Duke Energy stock is down 12.8% year to date. And there's reason to believe now is the time to step in and buy the stock.

Duke Energy had a diversified electric and gas utility business spanning North Carolina, South Carolina, Florida, Indiana, Ohio, Kentucky, and Tennessee. But its business is becoming even safer since announcing a $2.8 billion asset sale to Brookfield Renewable. The sale will affect Duke's cash flows, but it will also make those cash flows more stable.

Duke Energy is trading at a 16.1 forward price-to-earnings ratio thanks to the stock selling off and 13 consecutive years of dividend raises. The utility looks like a good, safe value stock with a high yield to consider now.

2. Dow: This chemical giant is built to last

Commodity chemical giant Dow, has kept the same $0.70-per-share quarterly dividend since spinning off from DowDuPont in 2019. Despite the lack of increases to the dividend of late, one thing that Dow has beefed up recently is its buybacks.

In its most recent quarter, Dow spent $492 million on dividends and $125 million on stock buybacks compared to $493 million on dividends and $250 million on buybacks in the second quarter and $496 million on dividends and $250 million on buybacks in the first quarter.

The gradual decrease in dividend obligation is due to fewer shares outstanding, and therefore, fewer dividends to pay. But buybacks also increase earnings per share. And when done while the stock is a good value, buybacks can be an excellent use of capital and benefit shareholders long-term.

There are good reasons to believe that Dow is a compelling value right now. But Dow's costs have gone up due to inflation and higher oil prices. Dow is also likely entering a weak period in the business cycle, which may lead to lower earnings and cash flows and make the stock look more expensive -- at least in the near term.

Despite these challenges, Dow has a lot going for it in the long term. It has the capital needed to invest through the cycle. And it has big plans to invest in the energy transition in a way that can diversify its business and benefit its bottom line.

Dow has the balance sheet and market position to endure a downturn and repurchase stock at a favorable price if the market continues to sell off. After all, Dow stock is up just 2.5% since the spinoff -- going basically nowhere despite much-improved fundamentals.

Add it all up, and Dow with its 5.7% dividend yield looks like a solid buy now.

3. BP has turned its business around

In 2020 during the height of the pandemic, BP cut its dividend in half. It was a blow to the confidence of income-orientated investors. But it was the right move, as BP's balance sheet had deteriorated, its earnings and cash flows had turned negative, and it was funding its expensive dividend with debt.

Since then, a rebound in the oil and gas market helped BP shore up its balance sheet. BP's total net long-term debt position is down 58% in the last three years. And it has increased its dividend to $0.44 per share per quarter compared to $0.63 per share per quarter before the dividend cut.

The stock, which is still down slightly over the last five years, now sports a forward yield of 4.9%.

What separates BP from other oil majors is its diversification. The company doesn't have as efficient of an oil and gas portfolio as Chevron and ExxonMobil. So while those companies are both doubling down on fossil fuels and limiting their low-carbon investments, BP is investing more aggressively in the energy transition, which may appeal to investors who believe now is the time for oil majors to diversify.

BP caught a lot of flak in February when it pulled back some of its climate targets. But the company still has ambitious 2025 and 2030 targets and continues to invest in renewable energy. For the nine months ended Sept. 30, 2023, BP made more replacement cost profit from gas and low carbon energy than it did from oil production and operations -- a sign that its business is changing. Of course, gas is carrying the segment's performance. But BP's renewables pipeline shouldn't be underestimated. As of Q3, BP has 2.5 gigawatts (GW) of installed renewables capacity, 6.1 GW of developed renewables to final investment decision, and a 43.9 GW renewables pipeline led by 28.5 GW of solar.

BP isn't the best oil major. But it is trying to be a balanced energy company. And its high yield, paired with its stronger performance, could make it a stock worth owning now.

A little more risk with a higher potential reward

Duke Energy, Dow, and BP don't stand out as the flashiest companies out there. But all three stocks have a yield higher than the 10-year Treasury rate. Investing in quality dividend socks is a way to get the potential reward (and assume the risk) that comes with investing in a company while also getting the passive income that comes with a bond or risk-free asset.

In sum, it's a way for investors who are willing to take on some risk to benefit from the growth of the economy without sacrificing the yield they could be getting from something like a Treasury note.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BP and Brookfield Renewable. The Motley Fool recommends Brookfield Renewable Partners, Chevron, and Duke Energy. The Motley Fool has a disclosure policy.

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