Dividend-focused investors are likely having a difficult time in this market, with artificial intelligence-oriented growth stocks with low or no payouts skyrocketing and many high-dividend stocks and sectors languishing.
But with the Federal Reserve unlikely to raise rates further, non-tech dividend stocks could be in for a revival, especially if inflation and interest rates cooperate.
The following two stocks are well-run companies that each pay a healthy above-market dividend, while also forecasting above-inflation growth.
NextEra Energy
The utilities sector is often thought of as a safe haven sector in times of recession. Most utilities are monopolies or duopolies in their geographies and are able to raise prices in lockstep with cost inflation, albeit in a regulated fashion.
But the worst environment for utilities might be one in which interest rates rise and there's no recession, because most utilities can't increase prices more than regulators allow.
That's what the surprisingly strong U.S. economy has done over the past 18 months or so. As a result, the utility sector has plunged about 21% off its all-time highs reached in late 2022 -- when other economically sensitive sectors were bottoming.
XLU Percent Off All-Time High data by YCharts
But with utilities now out of favor, now may be a good time to pick up some best-in-class names, like NextEra Energy(NYSE: NEE). Prior to the downturn in utilities, NextEra was hailed as one of the best of the sector. It's the largest U.S. utility in the fast-growing state of Florida, with an additional renewable power development arm that could sell projects down to its associated yieldco NextEra Energy Partners(NYSE: NEP).
That gave NextEra a premium value prior to the sector downturn, unfortunately setting NextEra up for an even bigger 40% fall off its highs.
NextEra took an especially big leg down when NextEra Partners lowered its annual target dividend growth to about 6%, or half its prior target rate, in September 2023. The reduction was due to higher interest rates, which curtail the amount the company can grow given the same amount of risk. That sent NextEra's and NextEra Partners' stocks plummeting.
However, with that decline now in the past, NextEra Energy trades at a quite reasonable 15.7 times earnings, along with a healthy 3.63% dividend yield. Meanwhile, NextEra has continued to execute, beating revenue and profit expectations last quarter. It deployed another 1,200 megawatts of solar and began commercial operations at its clean hydrogen pilot project at the Okeechobee Clean Energy Center. Management also forecast about 10% dividend growth in 2024 and between 6% and 8% growth in 2025 and 2026.
The Federal Reserve has indicated that it's likely done raising interest rates this cycle. So who knows? If rates drop more than people think from here, it's possible management could raise growth expectations just as it lowered them in a rising-rate environment. And for those who want to guard against recession, NextEra looks like a solid recession-proof stock now at a low valuation.
Image source: Getty Images.
TotalEnergies
The oil and gas sector went from very in-favor in 2022 following Russia's invasion of Ukraine to very out-of-favor, with moderating oil prices and plunging natural gas prices last year. But times like these may be the best time to buy into this cyclical sector.
French oil and gas giant TotalEnergies(NYSE: TTE) trades much more cheaply than its U.S. counterparts. This is despite having a relatively similar business model spanning upstream, midstream, and downstream oil and gas operations, liquified natural gas facilities, and a burgeoning renewable energy power portfolio. TotalEnergies has been very serious about tapping low-cost and low-carbon sources of oil and gas and investing in renewables, while divesting reserves in higher-carbon sources such as the Canadian oil sands.
While TotalEnergies' adjusted earnings plunged 36% to $21.4 billion in 2023, off the banner $36.4 billion earned in 2022, the stock only trades at a $150 billion market cap, a measly 7.4 times those low 2023 earnings figures. And TotalEnergies has just $6.3 billion in net debt -- practically nothing for a company its size.
The bargain-basement valuation has left TotalEnergies with a 5% dividend yield, while also leaving room for significant share repurchases. Not only that, but TotalEnergies' profitability has also given it the ability to invest in future growth. It achieved a 141% reserve replacement ratio in 2023, along with investments in its growing renewable power business, including within the U.S.
TotalEnergies forecasts another 6.8% dividend increase in 2024 after a 7.1% increase in 2023, with at least $2 billion in repurchases per quarter. At this valuation, that would decrease Total's share count by another 5.3%.
If you're looking for a great combination of a high dividend yield, repurchases, and growth, don't let this top European value stock pass you buy.
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William Duberstein has positions in TotalEnergies. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
