Talk about top or best dividend stocks, and chances are, high-yielding stocks will be the focus of the conversation. It's true that yield is a key deciding factor for dividend-seeking investors, but high yield doesn't necessarily make a great dividend stock. Prudent income investors should look beyond yields and pay greater attention to a company's cash flows trend, dividend growth prospects, and history among other things, before adding stocks to their portfolios. If cash flows and dividends aren't growing, a high-yield stock could even trap you.
For example, CenturyLink's (LUMN 2.33%) dividend yield has now shot up to 16%, attracting value and income investors alike. Some investors are betting on the telecom's acquisition of Level 3 Communications to help it ride out the storm, but in the absence of any earnings growth visibility as of yet and a payout above 100%, CenturyLink's dividend looks as risky as it can get.
As a long-term dividend-minded investor, you might want to avoid CenturyLink right now. Instead, you should be looking for stocks in top-quality businesses with strong earnings growth potential that can pay you stable, and even higher, dividends year after year. Three such top dividend stocks that you can buy today are industrial conglomerate 3M (MMM 0.35%), alternative-asset manager Brookfield Asset Management's (BN 2.35%) infrastructure arm Brookfield Infrastructure Partners (BIP 2.95%), and midstream oil and gas play Enterprise Products Partners (EPD 0.18%).
This dividend stock is a gold mine for income investors
Brookfield Infrastructure Partners was spun off from Brookfield Asset Management in 2008, and the stock hasn't looked back since -- it has been a five-bagger over the period, with nearly half of those returns coming off dividends alone. The stock's current yield of 3.9% looks very safe.
Buying top dividend stocks at the right time can boost your income substantially. Image source: Getty Images.
In fact, Brookfield is growing at a far stronger pace than its parent organization, having grown its funds from operations more than tenfold in the past decade compared to the 90% growth in Brookfield Asset Management's FFO. Two things have worked in Brookfield Infrastructure's favor: a top-quality portfolio of assets and a credible management that is efficiently steering the company to growth.
As an infrastructure assets company, Brookfield acquires high-quality, distressed assets at value prices across key sectors like utilities, railroads, telecommunications, infrastructure, and energy, and turns them around profitably. The fact that most of these industries offer essential services and thus generate regulated or long-term contracted revenue goes a long way in helping Brookfield earn stable cash flows and offer steady dividends.
Brookfield has grown its dividends at a compounded average clip of 12% since 2009 and has set out two broad "long-term" goals: grow its dividends annually by 5%-9% and earn 12%-15% returns on equity. Income investors can't go wrong with a dividend-paying stock that prioritizes shareholder returns.
59 years of dividend increases, and counting
3M's tiny dividend yield of 2% may not appeal to income investors, but the conglomerate holds an impeccable dividend track that's unlikely to break anytime soon.
3M belongs to the elite Dividend Aristocrat group, which comprises of companies that have increased their dividends for at least 25 consecutive years, regardless of the business cycles. 3M has paid uninterrupted dividends for 100 years, increased them for 59 straight years, and is only a year away from joining the handful of companies that have raised their dividends for six decades or more.
Behind 3M's incredible dividend record is its hugely diversified portfolio -- consisting of more than 60,000 products -- and brand power, backed by household names such as Post-it, Scotch, and Command. Through its five operating segments, 3M serves nearly every industry today, including consumer, manufacturing, healthcare, energy, transportation, airline, electronics, mining, and oil and gas.
3M recently upgraded its fiscal 2017 earnings-per-share growth projections to 10%-12%, and is confident of delivering on its five-year growth plans that it unveiled in 2016.
3M's sturdy dividends are backed by strong earnings and cash flow growth. Image source: Getty Images.
Going by 3M's strong recent operational performance and management's targeted 8%-11% growth in EPS through 2020 with 100% free cash flow conversion (percent of net income converted to FCF), income investors can safely rely on 3M for a steady flow of dividends for years to come.
When a slow dividend growth leads to a stronger dividend stock
With a dividend yield of 7%, Enterprise Products Partners is the highest-yielding stock on this list today. And while the midstream oil and gas company stock has given up some gains of late, its dividends are underpinned by strong operational numbers and management's practical approach toward capital allocation.
Enterprise Products Partners' dividend yield looks safe. Image source: Getty Images.
In a move that may have irked dividend investors, Enterprise Products Partners recently halved its quarterly distribution (dividend) growth rate to $0.0025 per share through next year. As my fellow Fool Matt DiLallo succinctly explains here, it is crucial for a master limited partnership to have a rock-solid balance sheet and a strong distribution coverage ratio. That's exactly what Enterprise intends to do, as CEO Jim Teague elaborated how the rate moderation will "further strengthen our distribution coverage, increase our retained distributable cash flow available to fund growth capital opportunities, and reduce unitholder dilution."
Remember, Enterprise isn't cutting its dividends but will only grow them at a slower pace now. That means while the company can use the additional cash to fund its huge pipeline of expansion projects, income investors can still expect higher dividends quarter after quarter. Enterprise, on its part, will continue its streak, having increased its dividend for 53 consecutive quarters now.
By 2019, management believes it will have retained enough cash to fund the equity portion of a $2.5 billion capital investment and even initiate a share repurchase program to return any excess cash to shareholders. I wouldn't be surprised if Enterprise bumps up its dividend again. Now, this is one high-yield stock that looks safe, thanks to management's prudent dividend policy.
Foolish takeaway
Each of the three dividend stocks that I discussed here has three things in common: a strong dividend history, firm dividend growth goals, and commitment to shareholder returns. When you can identify these factors in a stock and build a dividend portfolio accordingly, you can rest assured you're holding top dividend stocks that won't disappoint you in the long run.
