Chasing high yield can be a mistake if you don’t put in ample due diligence to ensure you’re not just going to be on the receiving end of a dividend reduction.
Indeed, high yields aren’t all they seem sometimes. They swell to elevated levels when times are tough, and a stock price sinks considerably off its highs. Many times, such selling pressure on a stock is fully warranted, given decaying fundamentals or operating cash flows. Such negatives could weigh on a company’s ability to keep paying a sizeable dividend. Other times, broader market weakness and near-term noise may be all that’s dragging down a high-yield stock. And if that’s the case, passive-income investors should be inclined to be buyers.
In this piece, we’ll have a look at two high-yield stocks I’d be comforting buying in the new year. Each name has been under a bit of pressure, but the dividend looks well supported by cash flows. There are many uncertainties on the horizon, most notably elevated interest expenses resulting from higher interest rates. While such uncertainties could bring forth further downside, paving the way for much higher yields, investors should feel comfortable averaging down into the following names presented in this piece.
Consider Enbridge (TSX:ENB)(NYSE:ENB) and Royal Bank of Canada (TSX:RY)(NYSE:RY), two high-yield stocks worth watching.
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Enbridge
Enbridge is a $100 billion pipeline firm that boasts a whopping 7% dividend yield. While sizeable, the payout is no cause for concern. The company has been through worse times, and the dividend has stayed intact, thanks in part to a confident management team that’s keen on keeping its passive-income promise to long-time shareholders.
Surging oil prices have been a huge sigh of relief for Enbridge shareholders. The stock has been on a steady run, up around 21% year to date. Still, the company holds a bit of baggage, even as the energy sector bounced back. Most recently, the stock plunged into a 12% correction before bouncing back modestly to $49 and change per share. I think the recent dip is a great buying opportunity for investors looking for a swollen dividend that’s not only supported by cash flows but could be subject to above-average annualized growth moving forward.
Indeed, hopes of US$100 oil are growing, and as optimism returns to the broader energy space, expect Enbridge to continue its ascent once again.
Royal Bank of Canada
Royal Bank of Canada is a Canadian bank that needs no introduction. The $191 billion banking giant has been on a heck of a run, outpacing the broader TSX Index with around 29% in gains year to date. The capital markets business really pulled through during the worst of the COVID crisis. With the rally showing signs of running out of steam going into year’s end, investors may be wondering if RY is about to take a back seat to some of its peers that stand to benefit more from higher interest rates.
At 12.1 times trailing earnings, you’re getting a top-notch bank on the cheap. The 3.6% dividend yield is not only bountiful, but subject to growth as the environment for financials improves in the new year.
