When a dividend stock offers a return much higher than the market average, it is usually a sign of danger.
A higher yield often indicates that payouts are at risk of being cut down the road. Companies in the midst of a turnaround or experiencing brief disruptions typically fall into this category. In a typical turnaround situation, companies are trying to reduce their massive debt burden, or they face a scenario where disruptors jeopardize their market share.
For investors interested in trying their luck in this part of the market, here are our two choices to consider:
1. AT&T
America's largest telecom operator, AT&T (NYSE :), is a high-reward bet, albeit potentially risky for retirees. With an annual dividend yield of 7.39%, it offers one of the best returns available from a blue chip stock with a long track record of paying dividends.
But that return is not without risk. Shares of the Dallas-based company have lost more than a quarter of their value since the beginning of the year as investors see great uncertainty about this iconic brand as its core businesses struggle to produce growth and the company accumulates massive debt . Shares traded at $ 27.75 at yesterday's close
AT&T Annual Review.
Since the outbreak of COVID-19, the operator has been under considerable pressure as many customers stop paying their bills, further straining money flows. In July, AT&T said 338,000 landline mobile subscribers stopped paying for their service because of the COVID-19 crisis.
The company said an additional 159,000 broadband customers and 91,000 TV subscribers are also stopping payments in the. AT&T and other carriers have vowed not to stop providing services to people affected by the viral crisis.
AT & T's dismal performance over the past five years is also a reflection of the company's debt-laden acquisition strategy, which has so far failed to deliver value. The DirecTV unit has lost millions of subscribers in recent years as viewers switch to on-demand entertainment services such as Netflix (NASDAQ :).
The communications services company bought the satellite television provider in 2015 for $ 49 billion, a deal that could barely fetch $ 20 billion, according to the Wall Street Journal. In 2018, AT & T & # 39; s acquisition of Time Warner worth $ 80 billion added HBO, the Warner Bros. film studio. and cable channels such as CNN to its portfolio.
For investors, the decision at this point is whether AT&T will successfully transform its business and be able to compete with entertainment disruptors such as Netflix, and whether such success would increase its quarterly payout of $ 0.52 per share. save.
2. Enbridge
Utilities are another area where investors can find higher dividends and a good income stream if they keep it for the long term. Enbridge (NYSE :), the largest gas and oil pipeline operator in North America, would be a good fit for this industry, with its massive moat and vital position in North America's energy supply chain.
Enbridge's cash flows are well diversified across many companies and regions, allowing the utility company to weather the economic downturn better than other companies.
For example, while the pandemic is harming consumption across the board, Enbridge's transmission, distribution and storage businesses, which account for about 30% of cash flows, are not expected to be significantly impacted by COVID-19 .
While many energy companies reported losses in the United States, Enbridge delivered a strong performance with adjusted EBITDA that increased to CAD $ 3.3 billion (USD $ 2.5 billion), compared to CAD $ 3.2 billion (USD $ 2.4 billion) a year ago. The company expects annual growth of 5% to 7% of its payout per share through 2022.
Enbridge 1 Year Pass.
This revenue stability makes Enbridge a good defensive stock when the economic headwinds begin to churn. The company pays a dividend of $ 0.62 per quarter, with an annual return of 8.37%.
Over the past three years, Enbridge has implemented a restructuring plan, sold assets, focused on its core strengths, and paid off its debts. These measures are likely to benefit long-term investors whose goal is to generate steadily growing income.
But investors don't see much value in owning energy stocks in this environment where oil demand is low and the company faces hurdles in its expansion plans from environmentalists. Enbridge stock, which was down 25% so far in 2020, closed at $ 29.61 in New York yesterday.
Bottom Line
Investing in turnaround situations can yield huge returns over time. But these companies certainly carry more risk, so investors should be very careful when choosing high yield stocks.
