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3 Top Dividend Stocks to Buy in February

Tyler Crowe, Sean Williams, and Brian Stoffel, The Motley Fool

As boring as they may be on the surface, dividend stocks tend to be some of the best investments for long-term wealth creation. Rarely will they wow you with huge gains in a single year, but letting those dividends reinvest themselves over decades can lead to incredible gains on modest initial investments. 

So we asked three Motley Fool contributors to highlight a stock they think is a great dividend investment today. Here's why they picked Big Lots (NYSE: BIG), Enviva Partners (NYSE: EVA), and TerraForm Power (NASDAQ: TERP)

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Image source: Getty Images.

A community retailer at a discount price 

Sean Williams (Big Lots): My dividend selection for February is a contrarian stock that's probably completely off most investors' radars: community retailer Big Lots.

Big Lots isn't without its fair share of problems. As a department-store-sized retailer, Big Lots has struggled in recent years with more innovative companies (ahem, Amazon.com) and has typically had to get more aggressive with its pricing and marketing to remain relevant. Furthermore, in December, following the release of its fiscal third-quarter results, Big Lots plunged after lowering its full-year profit forecast. Yet despite these concerns, I see value for income seekers.

Big Lots has made a habit of tripping over its own feet every couple of years, and over the past decade any dip below or around $30 has been a signal to buy. While we at The Motley Fool are not fans of trying to time the stock market, I do recognize the significance of entering a period where consumers will be receiving their federal tax refunds. That's generally a positive for retailers, and should especially provide some short-term relief for Big Lots.

What I find more significant about the company's poorly received third-quarter report is that comparable-store sales grew 3.4% and gross margin was virtually flat (down 10 basis points) from the year-ago period. This suggests that Big Lots is having no issue generating foot traffic and isn't having to discount its merchandise to drive that traffic. Generally speaking, that's a solid formula for growth in the retail space. 

On the other hand, selling and administrative expenses rose in the third quarter from the prior-year period. But it's a lot easier for a retailer to reduce administrative expenses than it is to solve the mystery of customer traffic, discounting, or inventory issues. In essence, Big Lots has the easiest of all problems to fix in the retail world -- and it has successfully done it before, creating confidence that cost-cutting can lead to margin improvements within the next couple of quarters.

Even with a reduced outlook, Big Lots currently trades for just under nine times next year's projected earnings per share, which is more than 40% below its average P/E ratio over the past five years. Additionally, its quarterly payout has grown by 76% over the past five years to $0.30 from $0.17. This works out to a 3.7% current yield (well more than the average yield for the S&P 500), and it leaves plenty of room for future dividend hikes with a payout ratio of less than 33%, based on Wall Street's consensus. My suggestion: Be daring and consider Big Lots this February.

The only dividend stock I own

Brian Stoffel (Enviva Partners): I am as far from a "dividend investor" as you'll find. With three decades until I reach retirement age, I like to focus on fast-growing companies that have multiple avenues for success. That's why there's only one dividend stock in my portfolio.

That dividend payer is Enviva Partners. The company has a unique niche: It has cornered the market on wood pellets in the southeastern United States. Those pellets are increasingly popular with foreign power companies, which have a mandate to cut back on greenhouse gas emissions.

Enviva signs these partners to long-term contracts and works on squeezing every ounce of efficiency from its operations to pay its dividend. That efficiency principally comes via locating plants near where timber is harvested, and deepwater docks on the Atlantic and Gulf Coasts.

A fire at one of the ports last year raised serious questions about the sustainability of the dividend, but the subsequent quarters have shown that the company has generated enough distributable cash flow to more than cover the 8.6% dividend payout. At the same time, however, I'm going to keep an eye on the average length of contracts at Enviva -- currently 9.4 years. There's a decent chance that wind and solar power could supplant the wood pellets, and nonrenewal of contracts will be the first place that trend starts to show up.

BIG Total Return Price Chart

BIG Total Return Price data by YCharts

Consistent dividends from a high-growth sector

Tyler Crowe (TerraForm Power): Renewable power is a tougher business than one might think. Sure, growth rates for new solar and wind installations are staggering, but the business also is moving rapidly down the cost scale, and it goes through incredibly volatile cycles of over- and undersupply. It's no surprise, then, that many investments in solar and wind have not been great long-term wealth generators. If there is one business that looks set up to succeed in this business, it's TerraForm Power. 

TerraForm Power is a yieldco with solar and wind power-generating assets around the world. Yieldcos have a spotty history for investors over the past few years. Most of them were created by equipment manufacturers as a vehicle to monetize development projects done in-house. This meant that most of these assets were sold at rates more beneficial to the manufacturer. TerraForm Power was once one of these manufacturer yieldcos, but when its former parent SunEdison went bankrupt, Brookfield Asset Management (NYSE: BAM) swooped in and bought it on the cheap.

This is TerraForm's distinguishing factor today. Brookfield Asset Management has a long, storied history of creating value in hard assets like power generation, property, toll roads, and just about any other piece of infrastructure you can name. The company's ability to deftly operate these assets as efficiently as possible and to sustainably grow the business with high-rate-of-return projects and counter-cyclical acquisitions has made some of Brookfield's other investments incredible wealth-creating investments.

BAM Total Return Price Chart

BAM Total Return Price data by YCharts.

In TerraForm's most recent earnings releases, you can already see the Brookfield playbook being put into place. The company, which currently has a 6.2% yield, expects to generate most of its dividend growth over the next year or so simply from internal improvements like new service contracts and renegotiating sales agreements. 

If you are looking for a high-yield investment with loads of potential and one that is backed by a management team with a long history of creating value, TerraForm Power is worth a look. 

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Amazon and Enviva Partners. Sean Williams has no position in any of the stocks mentioned. Tyler Crowe owns shares of Brookfield Asset Management, Brookfield Infrastructure Partners, and TerraForm Power. The Motley Fool owns shares of and recommends Amazon. The Motley Fool owns shares of Brookfield Asset Management. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.