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Headlines
- September Rate Cut Expectations: High-yield dividend stocks might regain appeal with the anticipated Federal rate cut in September.
- Enbridge and Rio Tinto: Both companies offer substantial dividend yields, making them attractive in the current economic climate.
- Market Volatility and Economic Data: Weak economic data and stock market volatility have increased the likelihood of a rate cut, benefiting high-yield dividend stocks.
Dividend stocks have lost some of their appeal in recent years as rising interest rates diminished the attractiveness of high dividend yields. However, the likelihood of a rate cut in September could revive interest in these stocks. Two companies that offer substantial dividend yields are Enbridge (ENB) and Rio Tinto (RIO), both yielding close to 7%.
The probability of a rate cut in September has increased over the past month due to stock market volatility and weak economic data, particularly the July unemployment figures. Nearly half of the traders surveyed by the CME FedWatch Tool now expect the Federal Reserve to cut rates by 50 basis points in September, a significant increase from just 6% a month ago. As interest rates decrease from multi-year highs, high-yield dividend stocks may become more attractive to some market participants.
Enbridge: Over 6% Dividend Yield Enbridge (NYSE:ENB) a midstream energy company, has an annual dividend yield of 6.84%. The company has a long history of paying dividends, with 69 consecutive years of distributions and 29 years of increases at a compound annual growth rate of 10%. As a Dividend Aristocrat, Enbridge targets a payout ratio of 60%-70% of its distributable cash flows (DCF).
In 2024, Enbridge increased its quarterly dividend by 3.1% to $0.915. The company’s earnings are stable and predictable, having met its guidance for 18 years. Enbridge expects its annual DCF to grow by 3% on average until 2026, with a forecast of 6% annual growth afterward. This growth in DCF should provide room for further dividend increases.
Enbridge’s consistent and predictable dividends make it attractive for those seeking reliability. The company trades at a next 12-month (NTM) price-to-earnings (PE) multiple of 17.8x, aligning with its average multiples over the past five years.
Rio Tinto: Nearly 7% Dividend Yield Rio Tinto (NYSE:RIO) unlike Enbridge, has a more cyclical earnings and dividend profile. The company used to follow a "progressive dividend policy," which aimed to increase dividends annually. However, this policy became unsustainable during commodity price slumps in early 2016, leading to a shift in their strategy.
Rio Tinto now aims to distribute 40%-60% of its underlying earnings as dividends over the cycle, remaining at the upper end of this range for the past eight years. The company’s earnings are closely tied to commodity prices, particularly iron ore, which accounts for the majority of its profits, followed by aluminum and copper. A potential Federal Reserve rate cut could boost commodity prices, benefiting Rio Tinto.
Despite the cyclical nature of its business, Rio Tinto’s recent decline has improved its risk-reward profile. The stock trades at an NTM enterprise value-to-EBITDA multiple of 4.56x, slightly below its five-year average and at a discount compared to peers like BHP. However, if the global economic environment deteriorates, particularly with slower growth in China, Rio Tinto shares may face pressure. Nevertheless, the increasing probability of a rate cut and potential global monetary easing could balance these risks.
Overall, Enbridge and Rio Tinto present attractive high-yield dividend options in the current economic climate, with Enbridge offering stability and Rio Tinto providing potential for capital appreciation amid market volatility.
