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Higher interest rates crushed higher-yielding dividend stocks in 2023. Rising rates made lower-risk alternatives like bonds more attractive. That weighed on the values of dividend stocks, increasing their yields to compensate investors for their higher risk profiles.

On the bright side, investors can now lock in even more attractive yields on some high-quality dividend stocks. Black Hills Corporation (NYSE: BKH), Clearway Energy (NYSE: CWEN)(NYSE: CWEN.A), and Devon Energy (NYSE: DVN) stand out to a few contributors as top buys for income-seeking investors right now.

Black Hills’ Dividend Yield Is Near Decade Highs

Reuben Gregg Brewer (Black Hills Corporation): Down 28% year to date, Black Hills Corporation should be appealing to investors looking for a reliable income stream. This electric and gas utility’s 5.1% dividend yield (which is near 10-year highs) could probably be matched by a CD today, but what you’ll have a hard time replacing is the over 50-year history of annual dividend increases. And with an average annualized dividend increase of roughly 5% over the past decade, it has outpaced the historical growth rate of inflation. In other words, unlike a CD interest payment, the buying power of Black Hills’ dividend has increased over time.

This relatively small $3.4 billion market cap utility serves 1.3 million customers across Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. It has seen strong population growth in its operating regions, historically, and that has allowed it to keep expanding its regulated utility operations. Looking forward, the transition to clean energy should provide a runway for more capital investment and, thus, further growth.

The stock has performed so poorly at least partly because higher rates make competing income investments more competitive, like CDs. Conservative investors have been switching despite the inherent risk of inflation. Also, Black Hills has a bit more leverage than some of its larger utility peers. Thus, higher rates are likely to be a bigger headwind. It recognizes the issue and is reducing leverage in 2023, paying for that by curtailing capital spending. So lower near-term growth is the trade-off for a brighter long-term future, with plans to increase capital spending in 2024. If you think in decades and not days, this is short term noise from a reliable Dividend King like Black Hills.

A fully powered dividend growth plan

Matt DiLallo (Clearway Energy): Shares of Clearway Energy have lost more than a quarter of their value this year. That sell-off has driven the clean energy producer’s dividend yield up to nearly 7%. That’s an attractive level for a company with all the power needed to grow its payout toward the upper end of its 5% to 8% annual target range through 2026.

Clearway’s renewable energy and natural gas power plants produce very predictable cash flow. The company expects to generate between $330 million and $360 million of cash available for distribution (CAFD) this year. That’s more than enough cash to cover its current dividend run rate of $77 million per quarter ($308 million annually).

The clean energy infrastructure company has a clear line of sight to grow its CAFD to $435 million over the next few years. Driving that outlook is the company’s capital recycling strategy. It cashed in on its thermal assets last year, receiving $1.35 billion in net proceeds from the sale. It has since secured enough high-return renewable energy investment opportunities to put all those proceeds to work over the next few years, so it already has all the power it needs to execute its dividend growth strategy for the next few years.

The slump in Clearway’s stock price has it offering a very compelling current yield these days. Add in its visible earnings and dividend growth, and the company could produce powerful total returns in the coming years, especially if its stock price recovers from its 2023 shellacking.

A powerful yet underrated dividend stock

Neha Chamaria (Devon Energy): Devon Energy stock is down nearly 26% this year, as of this writing, driving its yield to 6.5%. There’s a reason Devon shares lost favor with the market, particularly income investors, in recent months. The oil and gas stock pays a variable dividend pegged to its free cash flows (FCF) every quarter over and above a fixed dividend, and that variable payout has fallen in recent quarters in line with lower oil prices.

What the markets don’t seem to realize, though, is that Devon’s variable dividend can rise just as quickly if oil prices rise. In its third quarter, for example, Devon increased its total dividend (fixed-plus-variable) per share by 57% versus the second quarter, as its FCF more than doubled sequentially. Devon’s production per share increased by 10% in the quarter, and it continued to repay debt as well.

Income investors, in fact, have a solid reason to buy this beaten-down energy stock now. During its recent Q3 earnings call, Devon’s management stated that its “key priority” heading into 2024 is to grow its fixed dividend. That means more assured money in investors’ hands every quarter. On the flip side, management plans to keep its variable payout below the 50% threshold — Devon currently pays a variable dividend of up to 50% of excess FCF after funding its fixed dividend. However, management intends to buy back more shares, which, when coupled with a higher and growing fixed dividend, should eventually mean solid returns for shareholders who buy Devon Energy stock now.

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Matthew DiLallo has positions in Clearway Energy. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Black Hills. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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