With the Bank of Canada lowering interest rates and as many as four more rate cuts seen in the cards this year, income investors might find it worthwhile to turn their attention away from bonds and toward dividend paying stocks.
For this article, we focused on companies with strong fundamentals, including robust cash flows and consistent dividend payout histories, as these traits suggest financial stability and the ability to sustain dividend payments even in economic downturns.
Additionally, we looked for sectors that are less sensitive to interest rate changes and have growth potential, such as telecommunications, energy infrastructure, and renewable energy. The following stocks are known for their reliable dividends and strong cash flow.
We came up with three names:
Two of the stocks – Verizon and Enbridge – carry 4-star ratings, meaning they are undervalued based on Morningstar analysts’ estimates. The third – Brookfield – is a 3-star stock, meaning it is fairly valued.
Here’s a closer look at the three stocks:
Brookfield Corporation BEPC
Analyst: Brett Castelli
- Morningstar Rating: 3 stars
- Forward Dividend Yield: 4.75%
- Fair Value Estimate: $41.00
- Morningstar Uncertainty Rating: Medium
- Capital Allocation Rating: Exemplary
Owner and operator of clean energy assets, Brookfield Renewable has an impressive portfolio comprising hydroelectric, wind, solar, and storage facilities in North America, South America, Europe, and Asia, and totals over 20 gigawatts of installed capacity. The global firm offers two separate listings for investors: Brookfield Renewable Partners LP and Brookfield Renewable Corporation.
Historically, Brookfield Renewable's portfolio has been predominantly focused on hydroelectric generation. However, “that has changed in recent years given outsize growth in wind and solar,” writes Morningstar equity analyst Brett Castelli, He notes that hydro has decreased from approximately 80%-85% of the company’s portfolio five years ago to approximately 50% today.
Castello predicts hydro will have a dwindling share of the cash flow over time, making way for wind and solar that offer much bigger opportunities. In fact, solar has increased to 15%-20% of the portfolio as of 2022. The company has robust growth plans that aim to make solar the largest energy source in the long term.
In 2022, Brookfield Renewable expanded its investments to include broader energy transition assets beyond renewable energy. “This includes novel areas, such as carbon capture, as well as traditional fossil fuel and nuclear power generation,” says Castelli, who puts the stock’s fair value at $41.
The company plans for roughly 75% of its portfolio to be in developed markets while the rest in developing markets over time, to hedge against currency risk.
Enbridge ENB
Analyst: Stephen Ellis
- Morningstar Rating: 4 stars
- Forward Dividend Yield: 7.69%
- Fair Value Estimate: $57.00
- Morningstar Uncertainty Rating: Medium
- Capital Allocation Rating: Standard
Canadian energy behemoth, Enbridge owns extensive midstream assets and pipeline network across the U.S. and Canada. Its assets comprise the Canadian Mainline system, regional oil sands pipelines, and natural gas pipelines. The company also owns and operates a regulated natural gas utility and Canada’s largest natural gas distribution company, along with a small renewables portfolio primarily focused on wind projects.
Enbridge distinguishes itself among North American midstream operators with an earnings profile similar to that of a utility company.
“Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in U.S. light oil production,” writes Morningstar equity analyst Stephen Ellis.
More than 80% of Enbridge's EBITDA is protected against inflation and is supported by its gas transmission, a large utility based in Ontario, and a small renewables segment.
Additionally, the utility and renewables sectors, bolstered by recent strategic acquisitions, position Enbridge as a leading ESG-focused midstream operator, the report notes.
Enbridge’s narrow-moat liquids pipelines business is largely protected by long-term contracts in a region that is consistently short of pipeline capacity. However, its demand-driven gas transmissions business boasts a wide moat, given the quality and irreplaceable nature of the assets.
“We consider Enbridge’s assets to be of very high quality,” Ellis says, who pegs the stock’s fair value at $57.
Verizon Communications VZ
Analyst: Michael Hodel, CFA
- Morningstar Rating: 4 stars
- Forward Dividend Yield: 6.64%
- Fair Value Estimate: USD 54.00
- Morningstar Uncertainty Rating: Medium
- Capital Allocation Rating: Standard
U.S. telecom giant Verizon Communications offers wireless services (about 70% of total revenue) to 93 million postpaid and 21 million prepaid phone customers, making it the largest U.S. wireless carrier. It also has fixed-line telecom operations serving 29 million homes and businesses and about 8 million broadband customers.
Verizon is primarily focused on the wireless business, which holds roughly 40% of the U.S. postpaid phone market, or about a third greater than AT&T or T-Mobile.
The carrier has taken measures to ensure “it remains well positioned, building fiber deeper into major metro areas and acquiring wireless spectrum to increase network capacity and performance,” writes Morningstar equity analyst Michael Hodel.
The firm’s extensive presence in the wireless sector allows it to achieve the highest margins and returns on capital within the industry, the report notes.
Verizon, together with rivals AT&T, and T-Mobile, holds more than 90% of retail postpaid phone customers.
The fixed-line operations, however, face challenges despite its Fios fiber-optic network reaching about 18 million locations. Only about 40% of homes served by Fios subscribe to Verizon internet, a figure unchanged in the past five years, says Hodel, who pegs the stock’s fair value at USD 54.
That said, the segment has the potential to experience growth in the coming years, he adds. Hodel’s confidence is underpinned by Verizon increasingly tying its fixed-line business services to its enterprise 5G wireless offerings and expanded fiber network.
