2 Dividend Stocks to Consider Increasing Your Position In

Key Points

• Declining interest rates will drive more investors toward high-yield stocks.

• Energy Transfer’s “toll road” pipelines are generating stable profits and distributions.

• Verizon’s turnaround efforts should support its future dividend hikes.

• 10 stocks we like better than Energy Transfer ›

When interest rates surged in 2022 and 2023, many blue chip dividend stocks slumped as income investors pivoted toward risk-free CDs and Treasuries for higher yields. However, the Federal Reserve cut rates three times in 2024, and many investors expect one or two more rate cuts this year as inflation cools.

As that happens, the 10-Year Treasury's yield, which currently sits at 4.3%, should decline further and drive more income investors back toward higher-yield dividend stocks. These two stocks should benefit from that rotation: Energy Transfer (NYSE: ET) and Verizon (NYSE: VZ). They both pay high yields, trade at low valuations, and are built to generate stable returns through bull and bear markets.

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1. Energy Transfer

Energy Transfer, one of the largest midstream companies in America, operates over 135,000 miles of pipeline across 44 states. It provides pipeline, storage, and terminal sizing services for natural gas, natural gas liquids, crude oil, and refined products. It's a master limited partnership (MLP) that pays distributions, which include a return of capital to its investors, instead of regular dividends, which don't include a return of capital.

It generates most of its revenue by charging upstream extraction companies and downstream refining companies "tolls" to use its pipelines. That business model is resistant to volatile commodity prices because those companies need those resources to keep flowing through its pipelines. Energy Transfer also acquired several of its industry peers over the past five years, and it's expanding its smaller business of liquefied natural gas exports to serve more overseas customers.

That stable business model enables it to generate steady profits and pay high distributions. In 2024, it paid $4.39 billion in total distributions, easily covered by its annualized distributable cash flow (DCF) of $8.36 billion. It currently pays a high forward yield of 7.6%.

From 2019 to 2024, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew at a compound annual growth rate (CAGR) of 7% -- even as the pandemic, inflation, high interest rates, and geopolitical conflicts rattled the markets. From 2024 to 2027, analysts expect its adjusted EBITDA to rise at a CAGR of 5%. That's a rock-solid growth trajectory for a stock that trades at just eight times this year's adjusted EBITDA.

2. Verizon

Verizon, one of America's biggest telecom companies, serves 146.1 million wireless customers. But over the past few years, it struggled to consistently gain new wireless subscribers as its competitors ramped up their aggressive promotions and bundling strategies. The ongoing decline of its business wireline segment exacerbated that pressure.

That's why Verizon's stock slumped 25% over the past five years. But after that decline, it looks dirt cheap at 6.5 times this year's adjusted EBITDA. It also pays a hefty forward yield of 6%, while its low payout ratio of 63% gives it plenty of room for future dividend increases.

Some investors might be reluctant to buy Verizon's unloved stock, but it has plenty of irons in the fire. It's expanding its higher-growth broadband business with its Home Internet and FiOS fiber plans, and it expects to add more than 2.2 million new fiber subscribers after it closes its acquisition of Frontier Communications next year.

It also plans to bundle more wireless services with its broadband plans, integrate more AI features into its 5G networks to attract more enterprise customers, and use its own internal AI tools to streamline its customer support and network deployment services. If those efforts pay off, analysts expect Verizon's adjusted EBITDA to grow at a CAGR of 3% from 2024 to 2027. That stable growth could make it a great safe-haven play for income investors again.

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Leo Sun has positions in Energy Transfer and Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.