President Biden ran for office on a platform that included, among other issues, a sudden shift in direction from his predecessor’s fiscal policy. Biden’s plans included sharp increases in spending – as exemplified by the $1.9 trillion COVID relief bill passed this month – and addressing the inequality gap. Part of the strategy could mean higher tax rates for those at the top – a reverse of Trump’s corporate and wealthy individual friendly 2017 tax law. As part of the plan, Biden and the Democrats are looking to increase the corporate tax rate from 21% to 28%.
The worry is, increases in taxes will put pressure on future corporate profits, perhaps by as much as 7%. That, in turn, will put downward pressure on stock values, as investors pull back in response and seek returns elsewhere.
The easiest way to mitigate such concerns is to simply shift portfolio priorities from growth to dividends. While usually regarded as defensive stocks, dividend plays can make up an important part of any portfolio.
Bearing this in mind, we’ve used the TipRanks database to pull up the latest scoop on two dividend stocks that offer investors more than just a dividend. Yes, the yield is there – at almost 7% or higher – but these stocks also offer Strong Buy ratings from the Street’s analysts and considerable upside potentials. In fact, some analysts see that upside exceeding 40%. Let’s dive in and look at the details.
Enbridge, Inc. (ENB)
We’ll start our look in the Canadian energy sector, where Enbridge is that country’s largest distributor of natural gas. Enbridge boasts a series of ‘bigs’ in the energy transport industry, including a 25% market share in the movement of North American crude oil, and the distribution of 20% of the natural gas used by US consumers. Enbridge also operates the third-largest natural gas utility in North America, counting by total customers.
Enbridge saw big gains in earnings in its Q4 report, showing GAAP EPS increasing by 138% year-over-year to 88 cents per share. The C$2.25 billion in cash from operations was also a significant year-over-year gain. These strong quarterly results came even as the full-year results showed declines from the end of 2019.
Enbridge finished Q4 with C$2.2 billion in distributable cash flow, up 10% from C$2 billion in 4Q19. For the full year 2020, this metric – which is used to fund the dividend payment – came in at C$9.4 billion, a modest gain from the 2019 value of C$9.2 billion. These funds were put to good use; the company raised its quarterly dividend in 1Q21 by 3%, to 83.5 Canadian cents per common share. For US investors, this comes to 65 cents per share. Enbridge has a long history of reliable dividend policy, and has made 26 consecutive annual increases. The current dividend yields 7.27%.
No company exists in a vacuum, and Enbridge has gotten a boost from a recent transaction in the western Canadian oil sands. Brookfield Infrastructure Partners made a large purchase of midstream oil capacity from that region, in what was taken as a vote of industry confidence.
Evercore ISI analyst Todd Firestone wrote of the transaction, “…it should boost other Canadian operators, in particular ENB (O/P). We also would add an important caveat in that it is clear ‘moat’ type assets will be increasingly valued and this is all the more clear given where political/environmental challenges are set to evolve; this should favor long haul pipes (NGLs at the top), fractionation, and export, and on the down the line with gathering assets at the other end of the spectrum.” In other words, Enbridge’s exact niche should see a boost.
In line with this stance, Firestone rates ENB an Outperform (i.e. Buy), with a $55 price target suggesting room for 52% upside growth in the year ahead. (To watch Firestone’s track record, click here.)
Firestone’s upbeat outlook on this stock is no outlier – Enbridge has received 12 Buy ratings, for a unanimous Strong Buy analyst consensus. The shares are selling for $36.82 and their $42.91 average price target implies a one-year upside of ~17%. (See ENB stock analysis on TipRanks)
Brigham Minerals, Inc. (MNRL)
For the second dividend stock, we’ll stick with the energy industry. The oil and gas companies have a long reputation for paying out strong dividends. Brigham Minerals owns mineral rights to several of the United States’ most productive hydrocarbon production regions, including the Bakken Shale of North Dakota and the Delaware and Midland basins of Texas. The company is also active in Colorado and Oklahoma.
In its most recent quarterly report, Brigham showed a 10% quarter-over-quarter increase in mineral and royalty revenues, to reach $23.8 million. This supported an increase in the dividend, to 26 cents per common share. The current dividend increase is the second since the company had to lower the payments in response to the COVID epidemic and is indicative of returning confidence. At the new rate, the dividend yields 7.05%.
Despite running a net loss, Brigham has seen strong share appreciation over the past year. In the last 12 months, the stock is up by 92%. The share gains, plus the high dividend yield, give investors two sources of return on this stock.
Brigham is in the process of adjusting its dividend to hit a targeted payout ratio – a move that management is using to ensure the payment’s reliability, while also allowing a cash allowance for operations. Raymond James analyst John Freeman spells this out in his recent note on the stock, saying, “As we expected, the company reduced its payout ratio another 5% to 90%, resulting in an in-line distribution of $0.26/share. Recall that the long-term payout ratio target is unchanged at 75-80% range as MNRL seeks to retain cash flow to fund future acquisitions.”
Freeman believes this is a positive move for the company, and adds, “Barring any extraneous circumstances, our base case assumes additional 5% step downs in each quarter until reaching the 75% target in 3Q21.”
The analyst puts a Strong Buy rating on MNRL shares, and his $20 price target implies an upside of 45% for the next 12 months. (To watch Freeman’s track record, click here.)
This is another stock with a unanimous Strong Buy consensus rating, this one based on 4 recent Buy-side reviews. Brigham Mineral shares are trading for $14.47 and have an average price target of $18.75; this gives a one-year upside potential of 32%. (See Brigham’s stock analysis at TipRanks.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
