Our Three Favorite High Yielders for 2022
Last week, I reviewed the three equity income plays that I recommended at the start of 2021. As a group, they produced an average total return (share price appreciation plus dividends paid) of 44% compared to a gain of 29% for the SPDR S&P 500 ETF Trust (SPY).
I don’t know if this year’s group can match that, but I’ll give it a try.
Already, this year is shaping up to be quite different from 2021. A year ago, nobody was worried about inflation. Instead, we were wondering if the new vaccines for COVID-19 could be distributed fast enough to prevent a recession.
In fact, just the opposite turned out to be the case. Thanks to a very accommodative monetary stance by the Federal Reserve and significant direct cash payments by the federal government, consumers spent like never before last year.
Now, we have the opposite concern. Given the rapid decrease in the personal savings rate (PSR) during the fourth quarter of 2021, we worry if consumers will spend enough this year to keep the economy growing.
Regardless, macroeconomic trends already in place won’t be deterred by rising inflation or consumer apathy. They are massive infrastructure spending, rising commodity prices, and increasing gasoline consumption.
Accordingly, these three equity income plays should fare particularly well this year based on those trends.
If you want a safe bet in the infrastructure category, consider heavy equipment manufacturer Caterpillar (NYSE: CAT). It primarily sells to construction companies, oil drillers, and miners. Each one of those sectors should see a spike in revenue this year, which will increase demand for the type of machinery sold by Caterpillar
Under normal conditions, an old-tech industrial company such as Caterpillar should trade at a discount to the overall market. But these are not normal conditions. In 2022, Caterpillar could post record sales and earnings results if the macroeconomic trends cited above remain in place.
At a recent share price of $220, CAT pays a forward annual dividend yield of a little over 2%. That’s not great, but it’s higher than the yield on the 10-year Treasury note. Also, I expect Caterpillar to raise its dividend in 2022. That said, this is more of a total return play since I expect CAT to appreciate strongly during the second half of this year.
Rising commodity prices are bad for consumers but good for producers. That’s especially true if that producer is selling fertilizers to the agriculture industry, as BHP Group (NYSE: BHP) does. Last year, BHP sold off its oil drilling business and reinvested that money in producing fertilizers. Apparently, Wall Street did not agree with that decision and the stock took a quick dive as shown in the chart below.
This overreaction to BHP’s smart long-term move presents a short-term buying opportunity for income investors. At a recent share price of $67, the forward annual dividend yield for BHP works out to 9.3%. That high of a yield suggests that a dividend cut may be in the works, but I don’t believe that is likely to happen. The company has an operating margin of nearly 50% and is sitting on $15 billion of cash.
The biggest threat to BHP is its heavy reliance on China for most of its revenue. If the coronavirus pandemic once again spirals out of control, that could hamper BHP this year. However, it is difficult to imagine that the company will not benefit from increasing demand for the basic materials that it produces over the next several years.
The electric vehicle (EV) revolution has drawn attention away from the fact that gasoline consumption is rising. EVs may be the future, but combustible engines are still the present. That should allow Canadian midstream energy conglomerate Enbridge (NYSE: ENB) to raise its generous dividend, which at a recent share price of $41 equates to a forward annual dividend yield of 6.5%.
Enbridge is optimistic about the future. The company’s guidance for 2022 includes a 10% increase in its distributable cash flow (DCF), from which dividends are paid. Some of that will be reinvested in the business, so Enbridge is guiding for a 3% bump in its cash dividend payment this year to $3.44.
The company’s three-year outlook assumes a compound annual growth rate of 5% to 7% in its DCF. If that projection proves true, Enbridge should be able to grow its dividend by roughly half that amount each year. Combined with share price appreciation, I expect ENB to outperform the overall stock market this year.
I’ll let you know a year from now how these three picks panned out. In the meantime, I know of another way you can score big gains in the stock market this year. Our analysts have compiled a special report of seven shocking investment predictions for 2022, and how to profit from them. To download your free copy, click here.