It's easy to like dividend stocks. The obvious reason is that they supply recurring income. Many dividend payers also offer growth from a rising income stream and capital appreciation potential.
Enterprise Products Partners(NYSE: EPD), Oneok(NYSE: OKE), and Brookfield Renewable(NYSE: BEP)(NYSE: BEPC) stand out to a few Fool.com contributors as great options for income-seeking investors. Here's why those interested in dividends should take a closer look at this trio.
Enterprise is happy collecting tolls
Reuben Gregg Brewer (Enterprise Products Partners): The energy sector is generally broken down into three segments: upstream (drilling), midstream (pipelines), and downstream (chemicals and refining). Two of them, the upstream and downstream, are highly volatile because they're largely driven by commodity prices. The other one, the midstream, produces consistent fee income and is, thus, highly reliable. Enterprise Products Partners operates in the midstream.
Enterprise owns a massive collection of vital North American energy infrastructure, helping to move energy around the world. Demand for oil and natural gas, and the products into which they get turned, is far more important to Enterprise's financial performance than the price of the products moving through its system. Even when oil prices are low, demand for energy tends to remain strong because of the importance the fuel plays in the global economy. Collecting small fees for the use of its pipelines, storage, processing, and transportation assets isn't sexy, but it is reliable.
The proof shows up in Enterprise's distribution, which has been increased annually for 25 years. Although distribution growth is likely to be slow, those looking to maximize the income their portfolios generate will appreciate the huge 7% yield on offer here. And that yield is backed by an investment grade-rated balance sheet and a strong 2023 distribution coverage ratio of 1.7. In other words, the risk of a distribution cut seems very low while the chance for more slow and steady increases seems very high.
A needle-moving acquisition will fuel dividend growth
Matt DiLallo (Oneok): Oneok has been one of the more durable dividend stocks in the midstream industry. The pipeline company has delivered dividend stability and growth for over a quarter century. While Oneok hasn't increased its payout every year, it has grown by over 150% in the last decade, significantly outpacing its peers.
The company expects to continue increasing its dividend in the future. Oneok is coming off a transformational year. It closed its $18.8 billion acquisition of Magellan Midstream Partners last September, creating a more diversified midstream company. The deal provided a meaningful initial financial boost and visible earnings growth from cost savings and other commercial synergies for the next few years.
On top of that, the company has several high-return expansion projects under construction and in development. It recently approved a $355 million project to expand the capacity of its Elk Creek Pipeline, which should enter service in the first quarter of next year. It also expects to approve construction on its Saguaro Connector Pipeline this year. These and other projects will supply it with additional cash flow in the future.
Oneok aims to return 75% to 85% of its cash flow from operations after capital expenses to shareholders via dividends and share repurchases. It will retain the rest to strengthen its already solid balance sheet. The company expects to increase its dividend by 3% to 4% annually. It started 2024 off with a 3.7% dividend increase and now yields over 5%. With a high yield and visible growth, Oneok is ideal for those who like dividends.
A powerful income producer
Neha Chamaria(Brookfield Renewable): The energy patch boasts several high-yield stocks, but if I were to pick one stock today, it's Brookfield Renewable. That's because this stock's track record reflects dividend stability, while its growth plans suggest that its dividend payout is primed to get bigger with time alongside its cash flows. In other words, Brookfield Renewable's yield isn't just high but it also looks safe and reliable. While Brookfield Renewable Partners stock yields 6.3% currently, shares of the corporate Brookfield Renewable Corporation yield 5.9%.
It's a simple business model: Brookfield Renewable acquires and operates renewable energy assets and sells the power it produces under long-term contracts. Since demand for electricity is fairly resilient to economic cycles, the company can generate stable and predictable cash flows. In fact, nearly 90% of Brookfield Renewable's cash flows are contracted, and its average contract duration is 13 years. Moreover, the power tariff is indexed to inflation and can therefore boost the company's revenue steadily.
So for example, Brookfield Renewable expects inflation escalation to boost its funds from operations (FFO) per unit by 2% to 3% annually between 2023 and 2028. Add margin improvements, development pipeline, and potential acquisitions, and the company's FFO per unit could easily grow by 10% or more annually during the period. That should give Brookfield Renewable enough leeway to increase its dividend every year by anything between 5% to 9%. Given the company's strong balance sheet, a humongous pipeline of projects, and commitment to dividend growth, that means shareholders could earn double-digit percentage returns annually from Brookfield Renewable stock. That makes for a pretty compelling case to consider this high-yield stock today.
Should you invest $1,000 in Enterprise Products Partners right now?
Before you buy stock in Enterprise Products Partners, 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 Enterprise Products Partners wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
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 tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of March 25, 2024
Matt DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, and Enterprise Products Partners. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Brookfield Renewable. The Motley Fool recommends Brookfield Renewable Partners, Enterprise Products Partners, and Oneok. The Motley Fool has a disclosure policy.
