The energy sector has long been known as a hot spot for dividend investors. The world's never-ending thirst for energy has tended to deliver very solid cash flow for energy companies over the years. That said, sometimes energy companies do misjudge that thirst and overproduce energy, causing a lot of volatility in the energy sector, which is the scenario we find ourselves in today. Yet, despite this volatility, there are still some excellent energy dividends to be found. Here are three of our longtime favorites that we believe are great buys right now.
Jason Hall: Phillips 66 (PSX -0.66%) might be in the best-positioned of any of the so-called majors right now, and that's because it probably has the least direct exposure to commodity prices. As one of the world's largest oil refiners, demand is a bigger concern than price, and while demand growth is slowing, there is still steady demand.
Source: Philips 66.
Furthermore, the company's petrochemical business actually benefits from cheap oil and natural gas. As the world's largest producer of ethylene -- a molecule used to make everything from polyester to furniture to the tires on your car -- natural gas and oil products are a major feedstock, so falling prices are great for the bottom line.
Dividend investors should love this company. The dividend currently yields 2.7%, has been raised 28% in the past year, and is expected to be increased at least 10% each of the next two years. At the same time, the company just announced it will spend $6.8 billion on capital investments in 2015, largely aimed at growing the midstream and chemical businesses.
If you're looking for stable yield likely to grow over time, Phillips 66 is one of the best companies out there. The stock down 20% since September, and looks like a real bargain right now.
Tyler Crowe: The true test for a dividend paying company is whether it can maintain or grow that dividend even in the worst market conditions. While I can't guarantee Enterprise Products Partners (EPD 0.48%) will be able to do that, there are several promising signs that the company should be able to maintain its great track record of growing its dividend payment, which yields 3.9% already.
Let's start with the obvious reason: its massive distribution coverage ratio. Since 2010, when the partnership bought out its general partners' stake, Enterprise has been able to maintain a coverage ratio greater than 1.4 times -- which means free cash coming in the door is at least 40% greater than the distribution payments. So, even if the company were to see a large drop in cash coming in the door, there is plenty of cushion before the distribution gets compromised.
Then again, there doesn't appear to be any signs that the company's business is weakening with the fall in oil prices. On the contrary, Enterprise has for several years now been building its entire business around taking advantage of the major price discrepancies in the U.S. market. Domestic natural gas liquid products such as ethane, propane, and butane are selling for extremely cheap prices compared to global benchmarks, and Enterprise has a massive network of pipelines, processing facilities, and export hubs to convert these cheap petrochemical feedstocks into useful products and ship them around the world. As long as oil and gas activity remains strong in the U.S. and global prices for these products remain indexed for oil, Enterprise should have plenty of revenue coming in the door to increase that distribution for years to come.
Matt DiLallo: Kinder Morgan (KMI 0.27%) is about to become a dividend force to be reckoned with as it just completed a major corporate restructuring to put all of its subsidiaries under one corporate roof. Having simplified its structure, the company is now focused on delivering strong dividend growth through the end of the decade. The company's current plans call for a 16% boost to next year's dividend, with 10% annual dividend growth every year after that through 2020. That kind of dividend growth really adds up over time.
Source: Kinder Morgan.
The dividend is also very secure. Kinder Morgan currently anticipates it will be able to maintain at least a 1.1 times coverage ratio, with visible absolute dollar coverage that will leave it with at least $2 billion in excess cash flow between now and 2020. The reason the company has so much visibility into the future is because 82% of its cash flow is currently fee-based, and most of the rest of its cash flow is hedged. That provides a very, very solid foundation for the dividend.
Meanwhile, future growth is all but assured as the company has a five-year project backlog totaling just under $18 billion. Even better, 88% of the backlog is from fee-based assets. Further, the backlog doesn't include several potential projects in the pipeline, so to speak, as well as any potential future acquisitions. Needless to say, there's upside that could take the dividend, already yielding 4.3%, even higher in the years ahead than the company's already-robust plans.
Investor takeaway
There's a running theme among our favorite energy stocks for income, and that's security of revenue. All three companies have substantial revenue security from fee-based midstream assets, while Phillips 66 also benefits from lower energy prices. This provides a lot of insulation against the volatility from oil and gas prices and should allow these companies to continue fueling a growing dividend for their investors for a long, long time.
