Dividend Picks for 2021

Mike Hodel: Since we first started this dividend stock video series at the start of 2019, we've highlighted stocks across a variety of sectors, including tech, financials, energy, and telecom. But we haven't looked at two traditional sources of dividend ideas, consumer staples and utilities. This time around, we will rectify those omissions with two new dividend ideas and then review a handful of past ideas that we still think are attractive.

Among consumer staples, Kellogg K is currently one of our analyst favorites, trading at a 25% discount to our fair value estimate and it provides a nearly 4% dividend yield. While perhaps best known for its long-standing breakfast cereals, the firm has spent the past several years remaking its product lineup. On-trend snack items now account for around half of total sales, with cereal only around 20%. Recent acquisitions like RXBAR provide both solid growth potential and give Kellogg avenues to respond as consumers' tastes change in the future.

Turning to utilities, we don't think utility valuations have been particularly interesting in recent years, as low interest rates have lifted valuations across the sector. Utility shares typically get interesting from a valuation perspective when something goes wrong, and that's certainly the case with our utility pick this time around, Ohio-based FirstEnergy FE. The stock has tumbled over the past year and now trades at a 30% discount to our fair value estimate, providing a yield in excess of 5%.

The past decade has been challenging for FirstEnergy as its merchant power business ended up filing for bankruptcy protection. That issue was finally resolved in early 2020, allowing the core utility business to move forward. But shortly thereafter, though, the firm was caught up in another controversy surrounding alleged bribery to support passage of legislation in Ohio, leading to the arrest of the Ohio House Speaker and the resignation of FirstEnergy's CEO.

Despite this latest challenge, though, FirstEnergy's underlying businesses are in good shape. Its Ohio electricity distribution business, which only accounts for about 20% of total earnings, have base rates that are fixed over the next three years, and the remainder of the firm's businesses include distribution assets in other states and its federally regulated interstate transmission operations, which we expect will account for around a third of earnings by 2024.

While we haven't highlighted utilities in the past, we've certainly recommended a handful of energy companies, three in fact, over the course of this video series, Exxon XOM, Enbridge ENB, and Enterprise Products Partners EPD. While oil and gas prices have rallied recently, shares of several energy firms still look attractive to us with extremely attractive yields, including each of these three.

Exxon trades at a discount of greater than 40% to our fair value estimate, with a dividend yield that's now in excess of 8%. The firm has reduced capital spending recently to protect its dividend, but it still plans to invest enough over the coming years to double its earnings for the decade through 2027. We still believe Exxon is the strongest integrated energy operator globally, with opportunities to invest at attractive returns on invested capital, and that the market has overly discounted its prospects. Management has repeatedly reiterated its commitment to the dividend, and the balance sheet is in decent shape in our view. But we still think oil prices will likely need to recover for the dividend to prove sustainable over the long term.

Enbridge has also faced ups and downs since we discussed it at our mid-2019 dividend video. But we still expect the firm will be able to bring all of its major pipeline expansion projects online by 2023, fueling solid earnings growth. The stock still trades at about a 25% discount to our fair value estimate and offers an 8% dividend yield. Enbridge carries a fairly heavy debt load, but we expect its more utilitylike operations will continue to provide solid dividend coverage and support for the balance sheet for the foreseeable future.

And finally, we turn to Enterprise Products Partners. Similar to Enbridge, fee-based services and products make up a large percentage of Enterprise Products' earnings, 80% to 90% by our estimate, with heavy exposure to contracts and services that aren't heavily dependent on transportation volumes. The firm's operations also are diversified across a variety of end markets and service types, with things like petrochemicals and storage offsetting weakness in the current oil markets. The shares trade at a greater than 20% discount to our fair value estimate and offer a 9% yield, and we think the partnership units are still attractive.