Income-focused investors have had it pretty good for the past couple of years. Elevated interest rates made it easier to find passive income from places like high-yield savings accounts. However, the Federal Reserve recently announced a 50 basis point cut to the federal funds rate, the economy’s benchmark interest rate. Additional rate cuts are likely over the next year or so.

If interest rates fall far enough, it could push investors into the stock market to find their needed income. One obvious option these investors turn to is dividend stocks. High dividend yields are when they tend to look first, but high yields can sometimes be a red flag, so caution is needed.

For investors in search of safer high-yield options, these three dividend stocks are worth a closer look. Their strong fundamentals help support their hefty dividend yields, making them excellent buy-and-hold candidates. High yields also suggest the stock might be selling reasonably cheap, offering another reason to buy.

1. Enbridge

Current dividend yield: 6.5%

Investors have begun flocking to Enbridge (NYSE: ENB), which sits near 52-week highs today. The diversified Canadian energy company operates in North America and includes three business units: a pipeline network that transfers oil and gas, utility businesses, and renewable energy projects. It earns most of its profits in the first two segments, which are generally steady because it makes money on constant energy consumption and isn’t as sensitive to commodity prices. Thus, Enbridge has been a fantastic dividend stock; the company has raised its dividend annually for 28 consecutive years.

Enbridge’s 6.5% dividend yield is more appealing as interest rates fall, but its business benefits from lower rates, too. Enbridge frequently borrows to fund significant capital investments, so the lower rates will make its debt cheaper. Enbridge’s dividend is also financially secure, at a payout ratio of just 65% of forecasted 2024 cash earnings. Management expects the dividend to grow by 3% to 5% annually over the long term. That’s solid for a stock that trades at just 10 times its guided 2024 cash earnings today.

2. AT&T

Current dividend yield: 5%

U.S. telecom giant AT&T (NYSE: T) is emerging from a decade hampered by expensive failed acquisitions that led to it cutting its dividend in 2022. Yet, it’s on this list. Simply put, AT&T has cleaned up its act. The company has steadily spun off its acquired media assets, using the proceeds to shave tens of billions of dollars in debt off its balance sheet. AT&T recently announced it will sell its 70% stake in DirecTV for $7.6 billion, the last remaining piece of its infamous media conglomerate it still owns. Now, AT&T is back to focusing on wireless communications, which bodes well for the future.

Story continues

AT&T’s dividend still yields a robust 5% even after the cut, and it’s now well supported by healthy financials. AT&T anticipates about $18 billion in free cash flow this year, while its dividend costs are just $2 billion per quarter or $8 billion annually, a dividend payout ratio of just over 40%. Analysts estimate AT&T will grow earnings by an average of almost 3% annually over the next three to five years. However, AT&T pays nearly $7 billion in annual interest on its debt, and lower interest rates might add upside to earnings growth if the company can refinance some of its debt at lower rates.

3. Dominion Energy

Current dividend yield: 4.7%

Electric and gas utility company Dominion Energy (NYSE: D) has undergone significant changes, selling off most of its oil and gas businesses to concentrate primarily on operating as a regulated electric utility. U.S. electricity demand is estimated to grow by approximately 27% from 2022 levels by 2050, which helps explain Dominion’s decision to align itself this way. The company plans for $43 billion in capital investments and annual earnings growth between 5% and 7% from 2025 to 2029. The dividend yields 4.7% and remains a priority despite Dominion’s massive spending plans.

However, management isn’t planning to raise it until the company’s payout ratio improves. The dividend currently represents 81% of guided 2025 earnings, and Dominion will wait for growth to bring that down to under 70%. Long-term growth should eventually get the dividend moving higher again.

Data centers for artificial intelligence are popping up, and their intense energy requirements are impacting the energy conversation in America. Dominion serves Virginia, America’s top data center market, where the backlog to connect data centers to the grid is now as high as seven years. All this pent-up energy demand could boost Dominion’s growth beyond current expectations, making it an intriguing dividend idea despite the short-term limitations.

Should you invest $1,000 in Enbridge right now?

Before you buy stock in Enbridge, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Enbridge wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $716,988!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.

3 High-Yield Dividend Stocks That Are Screaming Buys in October was originally published by The Motley Fool