Why The Best Dividend Stocks Are Hated By Analysts

Thoughtful reader Terry K. asks for my favorite utility dividend—specifically why I prefer NextEra Energy Partners

NEP
(NEP) to Clearway Energy (CWEN):

“Would like your thoughts on CWEN vs. NEP. I’ve looked at both and based on numbers CWEN looks to be the better option.

It has just raised its dividend.

Plus, it is better liked by other analysts.”

Analyst ratings are a wonderful contrarian indicator. Thank you for writing in; I bet many of our fellow contrarians are asking the same thing! This is a great opportunity for all of us because it has been too long since we have lauded buying dividends that analysts dislike.

First, let’s put on our own analyst hats and compare the dividend growth numbers between NEP and CWEN. Terry, as you noted, CWEN boosted its dividend in May. The company has actually hiked its payout every quarter since the summer of 2020. And the safest dividend is one that’s just been raised. Nice.

Since CWEN began paying a dividend in 2015, shareholders have enjoyed a 91% shot in the dividend arm. Granted, it hasn’t been a perfectly smooth ride. CWEN cut its payout in early 2019.

Still, 91% higher is almost a double! But the stock price does appear to be a bargain, rising only 17% over the same period. CWEN’s “dividend magnet” appears overdue, with the payout poised to pull the price higher.

Why do I harp so much on payout growth? Because dividend hikes are the “second-level benefit” of buying high yielders.

We income investors love current dividends because they are cash now. Money in our accounts. Moola for us, plus a constraint on management to stay sane and not spend irresponsibly.

We especially appreciate payouts that grow because they correspond with stock prices that rise. Over time, for better or for worse, shares follow their dividends (higher or lower).

For example, last week Advanced Auto Parts (AAP) slashed its payout’s tires by 83%. The stock plunged, closing 71% below its previous “full dividend” highs. A reminder that no dividend bad deed goes unpunished.

So yes, to your point, Terry, CWEN is a relative value right now. Its share price is due to catch up with its dividend. That payout is still rising. CWEN, good, AAP bad.

My utility play NEP, though, looks great. Shares are literally being given away. First, let’s line up their dividends over the same time period. NEP’s payout is running laps around its rival.

NEP’s share price has outperformed CWEN’s (38% to 17%). More importantly, NEP’s dividend is climbing fast.

Chief Financial Officer Kirk Crews recently reiterated that NEP would boost its payout by 12% to 15% per year through at least 2026.

Shares yield 5.6% today. Which means we’re looking at expected returns of 17.6% to 20.6% annually, because it’s unlikely that the yield on NEP will climb much higher. (Dividend up, price static, yield up, buyers appear, price up, yield stabilizes.)

Instead, its price will probably rally as investors find their way back to utility stocks. These “bond proxies” were dumped alongside bonds as interest rates skyrocketed through 2022.

But that was last year. Today, we live in a world in which the Federal Reserve is just about done hiking. Long rates have topped and are gradually making their way lower as we head into the most telegraphed recession of all time.

Bullish news for utilities. Which means CWEN and especially NEP are likely to find nice homes in dividend portfolios soon. And we should expect their share prices to once again climb with each payout hike their management teams deliver.

And yes, when in doubt, give me the stock that is ignored or, better yet, hated by analysts. David Dreman explored this in his book Contrarian Investment Strategies: The Psychological Edge, as he showed that investors overvalue stocks that analysts like and undervalue those they don’t.

Think about it. If we buy a stock popular with analysts—rated a buy or strong buy—there’s nowhere to go but a downgrade. Which dings the share price.

On the other hand, stocks loathed by analysts are strong candidates for upgrades! When someone breaks rank and upgrades the stock, it pops on the news.

And wouldn’t you know it, last week Bank of America’s
BAC
Julien Dumoulin-Smith upgraded NEP. The stock is up 5% over the last five days, buoyed by the move.

But why wait for the Juliens of the world to approve our purchases? He merely cited our man Kirk and NEP’s dividend growth as his reason for the upgrade. Old news—to us!

Which is why we didn’t wait for Julien.

We careful contrarians don’t look for any analyst approval before we buy. We prefer to lead the Wall Street herd rather than follow it.

Give me the “who cares” setup we saw in LeMaitre Vascular (LMAT), a recent Hidden Yields pick. Three months ago, analysts offered three Buy ratings and three Holds. And Hold is Wall Street code for Sell, really, when analysts are afraid to rock the boat. So, we had a split caucus.

But LMAT should have been six Buys. Three suits missed this pop!

We bought LMAT after the firm had hired a bunch of new salespeople. And before these three analysts woke up! There was no need for us to wait for their approval. Profit margins at the medical device maker were “depressed” (at least by LMAT’s stellar standards) while the new employees ramped up.

We also liked LMAT as a play on a weaker dollar. This is far from the dangerous strong dollar bulldozer that smashes sales numbers and stock prices.

You would think analysts would see these catalysts. For whatever reason, half of the herd following LMAT did not.

Which is why we buy ahead of analyst approval. We don’t sit around and wait for it. Especially when it comes to buying dividend growers.

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.

Disclosure: none