Income investors have to evaluate a lot of factors when looking at the dividend stocks they add to their portfolios. One quick way to streamline the process is to focus on high-yield stocks of companies with long histories of dividend increases. Right now midstream energy players Magellan Midstream Partners LP (NYSE: MMP), Enterprise Products Partners LP (NYSE: EPD), and Enbridge Inc. (NYSE: ENB) look like top options. Here's what you need to know about each.
1. Lowest yield, safest option
Magellan's yield is currently a robust 5.5%. That's well more than double the roughly 2% you would get from an S&P 500 index fund, but it is the lowest among this trio of midstream stocks. That said, the master limited partnership has increased its distribution every single quarter since it went public in 2001, an 18-year streak.
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The relatively low yield is a function of Magellan's highly conservative approach. For example, as you can see below, the partnership's debt-to-EBITDA ratio is toward the low end of the midstream peer group. That's where it has been for a very long time, giving the company ample financial flexibility to deal with adversity. Meanwhile, the company targets a distribution coverage ratio of 1.2.
That strong coverage ratio target was a conscious decision by Magellan's management to assuage investor concerns about the safety of the distribution over time. Growth isn't going to fall by the wayside, however, as the company plans to spend $2.5 billion between 2018 and 2020 on growth projects that should support earnings and distribution growth of around 5% to 8% a year. The company generally only builds projects when it has customers lined up or when demand shows a clear need for expansion.
2. Slowing down to speed up
Enterprise Products Partners is one of the largest midstream companies in North America. Its yield is currently around 6%, and the distribution has been increased every year for 21 consecutive years.
Historically, Enterprise's distribution has increased in the mid to high single digits each year. However, the partnership is temporarily slowing distribution growth down into the low single digits. As in Magellan's case, however, this was a conscious choice. Enterprise wants to shift its business model so that it can self-fund more of its growth, which will reduce capital costs, limit dilution, and strengthen its business over time.
What it hasn't done is materially reduce capital spending. Enterprise currently has $5.7 billion worth of capital projects underway. Distribution coverage has been 1.2 or thereabout for a long time, but is currently at an incredible 1.5. That's a clear sign that Enterprise's plan to self-fund is playing out as expected. Over the next year or two, investors shouldn't expect huge distribution growth, but once the business has shifted gears, look for distribution growth to return to its previous levels. Patient investors can pick up a little extra yield from a midstream industry bellwether if they are willing to wait through the slow patch.
3. A slightly riskier option
Last up is Enbridge, a diversified Canadian energy company with a huge midstream business. The stock yields just under 6.1% today. It has increased its dividend every year for 22 consecutive years, one of the longest streaks in the midstream space. (Note that it is a Canadian company, so exchange rates can impact the quarterly dividends U.S. investors receive.) Still, it's only a good option for investors willing to get a little more involved with their portfolios. The yield is great. The dividend history is incredible. The underlying business is good, too. But Enbridge is in the process of simplifying its corporate structure by buying a collection of controlled companies.
Over the long term, this simplification process should be a good thing for the company and Enbridge Inc. shareholders. However, over the short term, it has led to an increase in leverage and uncertainty, since there are a lot of moving parts to this plan. Adding another layer of complication, Enbridge has no intention of slowing down its growth spending while it's going through this process, because it wants to provide investors with 10% annual dividend growth over the next couple of years. And, while it's doing all of that, it intends to sell non-core assets to help reduce leverage.
That's a lot of activity that will require careful monitoring. However, if you are willing to put in the time, the higher yield and higher dividend growth prospects here could be worth the effort.
Time for a deep dive
If you are looking for big yields from businesses that have long histories of rewarding investors, you should get to know this trio of midstream companies. Magellan is a steady tortoise that is executing its safety-first playbook. Enterprise has made the tough decision to slow its distribution growth down over the near term so it can better reward investors over the long term. And Enbridge Inc. has an enviable dividend track record and a robust yield, but it's only appropriate for investors willing to watch closely as it works through its major business revamp.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge, Enterprise Products Partners, and Magellan Midstream Partners. The Motley Fool has a disclosure policy.