One of the best aspects of putting your money to work on Wall Street is that a variety of investment styles can succeed. But when push comes to shove, it's pretty hard to beat the consistency of returns provided by dividend stocks.
A decade ago, J.P. Morgan Asset Management, the wealth management division of banking giant JPMorgan Chase, published a report that compared the total returns of publicly traded companies that initiated and grew their payouts to public companies not offering a dividend over a 40-year period (1972-2012). The results were literally night and day.
The income stocks generated an annualized return of 9.5% over four decades. By comparison, the non-payers only managed to deliver a 1.6% annualized return in the same span. Since dividend stocks are almost always recurrently profitable and time-tested, it's not a surprise to see them outperform over long periods.
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Though there are a handful of sectors and industries known for their sizable payouts, it's energy stocks that stand out for their truly robust capital-return programs. Even though the spot price of energy commodities can, at times, be volatile, select energy stocks offer exceptionally safe supercharged payouts.
If you want $300 in super safe annual dividend income, simply invest $3,075 (split equally, three ways) into the following three ultra-high-yield energy stocks, which sport an average yield of 9.77%!
Enterprise Products Partners: 7.49% yield
When it comes to safe, ultra-high-yield payouts in the energy sector, Enterprise Products Partners(NYSE: EPD) is in a class of its own. Enterprise has increased its base annual distribution for 25 consecutive years, which is virtually unheard of for a company that's currently doling out in excess of a 7% yield.
Whereas some investors may be leery of putting their money to work in oil or gas stocks following the demand cliff dive observed during the COVID-19 pandemic, Enterprise Products Partners has mostly avoided these struggles. That's because it's one of America's leading energy middlemen.
Midstream energy providers like Enterprise both transport and store oil, natural gas, natural gas liquids, and refined products. Enterprise Products Partners can store more than 260 million barrels of liquids, 14 billion cubic feet of natural gas, and it operates more than 50,000 miles of transmission pipeline.
The beauty of this operating model can be seen in the contracts it signs with drilling companies. A majority of its deals are long-term, fixed-fee contracts. "Fixed-fee" deals remove the effects of inflation and spot price volatility from the equation. This allows Enterprise to accurately forecast its cash flow from one year to the next, which is incredibly important when it comes to outlaying capital for new projects, acquisitions, and its ever-growing distribution.
Speaking of new projects, the company has well over a half-dozen major projects under construction totaling approximately $4.1 billion. These projects, which primarily lean toward natural gas liquids, are slated to come online between the second-half of 2023 and first-half of 2026. Most importantly, they'll be earnings accretive for a company that's trading at a mere 10 times forward earnings.
If you need one more reason to be excited about Enterprise Products Partners' future, consider this: the rising spot price of West Texas Intermediate (WTI) crude oil is only going to encourage drillers to increase their production. This means more lucrative deals are likely in Enterprise's future.
Antero Midstream: 7.59% yield
A second ultra-high-yield energy stock that can help investors generate $300 in exceptionally safe annual dividend income from an initial investment of $3,075 (split equally, three ways) is Antero Midstream(NYSE: AM).
As you can probably gather by the company's name, it's another midstream operator. The difference is that Antero Midstream is primarily focused on natural gas and natural gas liquids in the Marcellus and (to a far lesser extent) Utica Shale.
Further, it generates most of its revenue from deals with parent Antero Resources(NYSE: AR). It provides high-and-low-pressure gathering, compression, and water handling services for Antero Resources and other upstream drillers.
The top reason Antero Midstream is such a no-brainer buy for income seekers is that all of its long-term deals are fixed-fee. This means 100% of the revenue Antero Midstream generates is completely protected from the effects of inflation and wild vacillations in the spot price of natural gas. The key takeaway is that Antero Midstream can count on highly predictable operating cash flow every year, which gives management the confidence to undertake new projects and make acquisitions.
For instance, Antero Midstream agreed to acquire gas gathering and compression assets from Crestwood Equity Partners in the Marcellus Shale last year for $205 million in cash. These bolt-on acquisitions provide the company with a way to increase its pipeline exposure in the region and generate incremental growth in its operating cash flow over time.
Antero Midstream also finds itself in the sweet spot when it comes to capital expenditures. Management is forecasting a decline in capital spending in the coming years, yet it's expected to see parent Antero Resources increase its drilling on acreage owned by Antero Midstream. In short, operating cash flow should be headed meaningfully higher in the years to come.
Image source: Getty Images.
Alliance Resource Partners: 14.23% yield
The third ultra-high-yield energy stock that can deliver $300 in super safe annual dividend income from a starting investment of $3,075 (split equally, three ways) is coal producer Alliance Resource Partners(NASDAQ: ARLP). Alliance Resource offers the juiciest relatively "safe" dividend in the energy sector at greater than 14%!
The general belief heading into the 2020s was that coal stocks were running on borrowed time. With big dollars being spent on green-energy projects, coal was expected to wane in importance. However, the COVID-19 pandemic completely changed those plans.
Since the pandemic began in 2020, energy majors worldwide have pared back their capital investments, which has constrained the global supply of oil. Additionally, Russia's ongoing war with Ukraine clouds the energy supply needs of Europe. Combined, these uncertainties have allowed coal producers to step up production and effectively fill the world's energy needs at a time when oil supply is tight. Producers like Alliance Resource Partners are basking in historically high per-ton coal prices.
On top of favorable macro factors, Alliance Resource Partners' forward-thinking is coming in handy. With coal prices well above their long-term norm, the company has been booking production up to four years into the future. Based on the midpoint of the company's 2023 production estimate (35.75 tons), it's priced and committed 96.5% of its output this year and 75.2% of its production in 2024. Pricing and committing its output well in advance makes the company's operating cash flow highly predictable.
As I pointed out last week, management has historically been conservative with its expansion efforts. Whereas many of its peers have buried themselves in debt to take advantage of higher coal prices, Alliance Resource Partners has mindfully expanded its production capacity without relying too heavily on debt. As of June 30, the company had a very manageable $132.3 million in net debt.
Finally, don't overlook Alliance Resource Partners' oil and gas royalty assets. Though it still generates the bulk of its sales from coal, the company's royalty interests provide a way to take advantage of rising crude oil and natural gas prices over time.
At a forward price-to-earnings ratio of less than 4, you likely won't find a cheaper supercharged income stock than Alliance Resource Partners.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
