Image source: TransCanada Corporation.
This past February, ConocoPhillips (COP +1.35%) announced that it was cutting its dividend by two-thirds, which came as a shock to investors. That is because its management team repeatedly said that the dividend was safe and that growing it was its top priority. However, the company believed that the reduction was the prudent course of action given the prodigious slump in oil prices and its expectation that prices could remain low for quite a long time. Still, the reduction tarnished the company's reputation with income investors, who have several better options for a secure income stream than the oil giant.
The Canadian pipeline powerhouse
Canadian energy infrastructure company TransCanada's (TRP +0.95%) current yield of 3.5% is about as generous as ConocoPhillips' reduced rate of 3.7%. That said, two things set TransCanada's payout apart. First, fee-based assets support more than 90% of its earnings while ConocoPhillips' earnings are virtually 100% exposed to volatile commodity prices. That relative cash flow stability is one reason why TransCanada has been able to grow its dividend during the current oil market downturn.
Furthermore, TransCanada has clear visibility to increase its payout by an average of 8% to 10% per year through at least 2020 due to the $25 billion in near-term growth projects it has in development. That visibility is clearly lacking at ConocoPhillips, which has a vague plan to "target annual real growth in the dividend." Needless to say, TransCanada's secure payout and visible growth make it a much better choice.
The clean energy giant
Leading clean energy company NextEra's (NEE +1.21%) current yield is a bit below ConocoPhillips' but it is still a respectable 2.8%. Moreover, the company has a history of providing investors with sizable annual dividend increases, with the payout growing by an 8.1% compound annual growth rate over the past decade, matching the growth rate of adjusted earnings. Like TransCanada, driving that growth is the company's ability to build or buy assets that produce steady cash flow.
One of the key drivers of NextEra's growth is its renewable energy development program, which continues to expand as the company adds new projects to its backlog. Those projects are expected to help fuel 6% to 8% compound annual growth in adjusted earnings per share through 2018. That steady earnings growth should also power pretty consistent dividend growth over that same time frame.
The real estate mogul
Brookfield Property Partners (BPY +0.00%) offers investors the highest yield of the group at nearly 5%. The other big difference is that its yield is not powered by energy assets but by real estate. The company owns a core portfolio of top-quality office and retail properties as well as opportunistic investments in multifamily, hospitality, and other real estate classes. These assets provide pretty steady cash flow thanks to the long-term leases that underpin these properties, which enables Brookfield Property Partners to support its lucrative payout.
The company also offers investors visible growth, with plans to increase its funds from operations by 8% to 11% per year through a combination of growing occupancy and rent as well as redevelopment and development projects. In fact, the company currently has nearly $6 billion in office and multifamily development projects underway, along with another $500 million in office and retail redevelopment projects. This organic growth alone supports its view that it can increase its payout by 5% to 8% per year over the long term.
Investor takeaway
Commodity price volatility got the best of ConocoPhillips' dividend this year, forcing it to cut its payout by two-thirds. While it intends to restart dividend growth eventually, it is vague on how quickly or by how much it can grow the dividend in the future. That is why income investors are better off forgetting about its payout and considering TransCanada, NextEra Energy, or Brookfield Property Partners instead. Not only do all three offer generous current yields, but each has a clear path to grow their payouts by a pretty compelling rate for the foreseeable future.
