If there's one thing retirees need, its income that they can count on through thick and thin. However, secure sources like pension plans, annuities, and Social Security often don't provide enough money to meet their needs. To prepare for that reality, many look for investments that will produce additional income streams, and popular among those options -- especially in the current low interest rate environment -- are dividend-paying stocks.
While putting your money in the stock market always exposes your assets to some hazard, there are lower-risk choices to provide those sought-after income streams. In the energy sector, for example, three top choices are Enterprise Products Partners (EPD 1.41%), TransCanada (TRP 1.16%), and Dominion Energy (D 2.62%). All pay well-above-average yields supported by top-notch financials.
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Bond-like yield and risk, but with stock-like upside
Enterprise Products Partners is one of the top energy sector MLPs to buy. The oil and gas pipeline company offers investors an enticing distribution that currently yields 6.9%, which is light years above the 1.8% average yield of stocks in the S&P 500. In fact, Enterprise's yield is near its highest level in years thanks to consistent quarterly payout increases and a double-digit percentage decline in its share price this year. While that dip in value highlights the point that this isn't a risk-free investment, it also provides investors an excellent opportunity to open a position in a top-notch income stock at a lower price.
Enterprise's top-tier financial profile is what makes it a particularly attractive option for income seekers. For starters, because fee-based contracts underpin about 92% of its earnings, it generates very consistent cash flow. It has one of the strongest balance sheets among energy MLPs, the best credit rating in the sector, and relatively low leverage. On top of that, the company generates more than enough cash flow to cover its distribution. In fact, its aim over the next few years is to increase coverage to such an extent that it can pay a growing distribution (backed by $9 billion in expansion projects) and finance its expansion plan with internally generated cash flow. That level of fiscal self sufficiency is a rarity among energy MLPs, and makes it an even safer option for retirees. Because of these factors, the company offers bond-like characteristics with the upsides of owning a stock, since it should continue growing its cash flow and distribution for the foreseeable future.
A lower yield today, but with more growth coming
Canadian energy infrastructure giant TransCanada shares many similarities with Enterprise Products Partners; it has an excellent credit rating and gets more than 95% of its cash flow from stable sources like fee-based contracts. The only major difference is that Enterprise is an MLP while TransCanada is a corporation. That's one reason why TransCanada has a lower current yield of 3.9%, with the other being that it only pays out about half its cash flow in dividends while Enterprise shells out closer to 80%.
That said, what TransCanada lacks in yield it more than makes up for with its growth prospects since it reinvests its excess cash into expansion projects. Because of that, the company expects to grow its dividend by 10% per year through 2020, and plans an 8% to 10% increase in 2021. That's a much faster growth rate than Enterprise, which recently tapped the brakes on its payout growth so that it could finance a larger share of its expansion projects with cash flow rather than having to issue more equity. Meanwhile, for TransCanada, the 24 billion Canadian dollars ($18.7 billion) of growth projects it currently has under construction should increase its earnings by 10% per year through 2020.
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The high-growth utility company
Utilities typically offer bond-like returns for investors given their slow growth profile. However, Dominion Energy isn't a traditional utility. The company currently plans to invest between $3.7 billion and $4.2 billion per year on expansion projects through 2020, which should grow its earnings by 6% to 8% annually. On top of that, the company expects to receive an increasing stream of cash from its MLP, Dominion Energy Midstream Partners (NYSE: DM). These factors should combine to support Dominion's ability to raise its 3.5%-yielding dividend at a 10% annual rate over the next three years. That's an acceleration from the 8% payout increases the company delivered in each of the past three years, and double the growth rate of the average utility.
Dominion supports that plan with a rock-solid financial position. The company has an investment-grade credit rating, predictable cash flow since about 90% of its earnings come from stable, utility-like businesses, and it currently pays out about 85% of its profits via the dividend. Beyond that, it expects to bring in between $7 billion and $8 billion in cash through 2020 by selling stakes in its midstream assets to Dominion Energy Midstream Partners -- funds it can use to help finance growth projects. Those factors reduce the company's risk profile, enabling investors to sleep soundly knowing the utility shouldn't have any difficulties meeting its ambitious growth targets.
The formula for success
What I like about this trio of energy infrastructure giants is that each pays a high dividend that's at low risk. Three factors are key to the security of those payouts. First, each business generates predictable cash flow, with more than 90% of revenue coming from fee-based or utility-like sources. Second, all have excellent balance sheets backed by investment-grade credit metrics. Finally, each company can cover its current dividend with room to spare.
That said, what pushes this trio over the top is that they all have clear growth prospects, with large slates of expansion projects underway. Those new additions will drive cash flow higher, enabling payout increases in the coming years. That type of low-risk income growth potential will go a long way toward helping retirees meet their future needs.
