The U.S. equity market has been relatively volatile over the past couple of months, and some individual stocks have been quite volatile. In addition to concerns about the omicron variant wreaking havoc on the still-recovering global economy, the market is also worried about the higher-than-expected inflation.
With the U.S. consumer price index (a metric used to assess inflation) rising by 6.8% year over year in November 2021, the fastest increase since 1982, the Federal Reserve may now need to rapidly reduce its pace of bond buying. This news may not bode well for growth stocks, which have benefited tremendously in the last decade from an ultra-low interest rate environment.
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Retail investors looking to balance out their portfolios to manage the volatility need to invest in fundamentally strong companies that provide a predictable income source (even though inflation may erode some of their purchasing power). While the risk of a stock is sometimes highly correlated with its dividend yield, there are still a few companies that offer robust dividend payouts while maintaining a reasonable risk profile.
Building on this idea, Enterprise Products Partners (EPD -0.07%) and Lumen Technologies (LUMN -1.51%) are two ultra-high-yield dividend stocks that are attractive buys this December. Let's look at why.
1. Enterprise Products Partners
Leading midstream oil and gas player Enterprise Products Partners offers a dividend yield of 8.53%. This master limited partnership (MLP) has been increasing its distribution (a special kind of dividend) for the past 23 consecutive years and is now close to reaching Dividend Aristocrat status. Enterprise's year-to-date distributable cash flow of $5 billion (ended Sept. 30) was almost 1.7 times its total distributions. Its adjusted payout ratio (the combination of cash distributions and share buybacks as a percentage of cash flow from operations) was 58% for the 12 months ended Sept. 30. Hence, Enterprise's dividends seem quite safe for the foreseeable future.
The strength of Enterprise's business model will also ensure many more years of reliable payments for retail investors. While the majority of oil and gas companies severely underperformed the overall market in 2020, Enterprise proved to be an exception. Enterprise's integrated asset base (50,000 miles of pipeline, 19 natural gas processing facilities, and 260 million barrels of natural gas liquids, petrochemicals, refined product, and crude oil storage capacity) is a strong moat. It allows Enterprise to optimize and repurpose the use of these assets for servicing profitable commodities.
Since Enterprise is in the business of transporting and storing oil and crude products, its revenue is not wildly affected by the fluctuations in oil and gas prices. Instead, it is determined by long-term fee-based contracts with upstream players. This can also offer protection in times of rising inflation, considering that 90% of its revenue includes escalation mechanisms linked to various indices. Enterprise's presence in petrochemical midstream services is also a major competitive advantage, considering that 60% of the future growth in global oil demand is expected to be driven by rising demand for petrochemicals.
Many solid growth catalysts underline the resilience of Enterprise's business model. A dependable history of distribution growth, more than sufficient cash flow coverage, a solid balance sheet, and trailing-12-month net debt-to-adjusted EBITDA of 3.2 times (much lower than the long-term target of 3.5 times) makes this MLP very well suited for income investors.
2. Lumen Technologies
Telecommunications player Lumen Technologies offers a solid 8.24% yield. Since the first quarter of fiscal 2019, the company has maintained its annual cash dividend of $1 per share, despite the pandemic pressures. The company's third-quarter (ended Sept. 30) dividend payout ratio has improved 22% year over year to 54%. Lumen's annual dividend payout translates to $1.1 billion, which will be sufficiently covered by its fiscal 2021 projected free cash flow of $3.6 billion to $3.8 billion. This highlights Lumen's ability to continue its dividend payments in the coming quarters. On the third-quarter earnings conference call, the company's management also reiterated its commitment to maintaining an annual dividend of $1 per share.
Lumen currently owns 450,000 miles of fiber connecting 180,000 on-net buildings and 2,200 data centers across the world. The company's Quantum fiber platform (servicing small business and residential customers) will mostly be targeting economically attractive high-density urban and suburban areas in 16 U.S. states. The company also provides business solutions such as edge compute services, adaptive networking, and security services to enterprise customers. Lumen claims that its broad fiber network coupled with edge compute nodes can reach over 98% of the enterprises in the U.S., Europe, and some Latin American countries with a latency of just five milliseconds. With high-capacity fiber infrastructure required by 5G builders as well as for running cloud applications and edge computing services, the company is well poised to benefit tremendously in the coming years.
Lumen's top line has been under pressure in the past few quarters. However, the company may return to revenue growth in the next two to three years. An improved business mix is expected after the divestitures of its Latin American business and incumbent local exchange carrier operations in 20 U.S. states. Management has also focused on paying down debt ($31 billion at the end of the third quarter) as well as improving the debt maturity profile. Considering its robust growth prospects in the fiber and enterprise business, its focus on reducing leverage, and its commitment to maintaining its dividend, Lumen is a safe high-yield stock for retail investors.
