Investors seem to despise pipeline giants Kinder Morgan (NYSE:KMI), Enbridge (NYSE:ENB), and Plains All American Pipeline (NYSE:PAA) these days given that all three are down more than 20% over the past year. Yet while the market currently hates these stocks, dividend investors should be rejoicing, because those who take advantage of this beatdown can lock in some pretty compelling yields.
An even bigger income stream
Enbridge's stock has lost about 20% of its value over the past year. Because of that, and a 15% dividend increase over that time frame, the yield has risen from 4.3% to 6.2%. Finding a reason to justify this sell-off isn't easy. While the Canadian energy infrastructure giant did expect available cash flow from operations (ACFFO) to drop about 8% last year, that was because the company issued a large number of new shares to finance its growth initiatives. The company expects those investments to pay off this year, with ACFFO per share on pace to rise 15% versus 2017, which would put it more than 5% above 2016's level.
Meanwhile, future growth projects should push the company's ACFFO per share up by a 10% compound annual rate through 2020. That forecast leads Enbridge to believe it can continue increasing its dividend at a similar 10% yearly clip over that time frame. Further, the company noted that it could deliver this growth while also improving its balance sheet and maintaining a conservative payout ratio of less than 65% of its annual cash flow.
After considering everything Enbridge has going for it, I couldn't resist taking advantage of the sell-off to buy more shares and bolster the income I receive from the oil pipeline giant.
A much higher yield is on the way
Kinder Morgan's stock has tumbled nearly 24% over the past year. As a result, the U.S. natural gas pipeline giant's yield has improved from 2.2% to 2.9%. An even bigger income stream is just around the corner for investors who take advantage of the company's sell-off. That's because Kinder Morgan has promised to boost its payout 60% this year. The upcoming dividend increase implies that shares actually yield 4.7% on a go-forward basis.
Further, Kinder Morgan expects to continue increasing its payout at a rapid pace in the coming years, with it planning to boost it 25% in both 2019 and 2020. If it hits that goal, the yield for those buying today would be an impressive 7.3% in a few years. Further, even at that much higher rate in 2020, Kinder Morgan would only be paying out about half its annual cash flow, which gives it ample funds to pay down debt, repurchase stock, or invest in high-return growth projects that would fuel future dividend growth.
Getting ready for the turn
Plains All American Pipeline has been pulverized over the past year, with units of the oil pipeline MLP sinking more than 30%. It's the only semi-justifiable downward move of this trio, fueled by the company's poor performance earlier last year due to continued market challenges. Those issues ultimately forced Plains All American Pipeline to slash its payout 46% so it could free up cash to pay down debt. As a result, Plains' yield has declined from 7% to 5.5% over the past year.
That said, Plains All American Pipeline's turnaround plan is on track, which puts the company on pace to restart distribution growth early next year. Once Plains hits its goal, it could follow Kinder Morgan's blueprint by resetting the distribution much higher in early 2019 and still deliver a healthy growth rate in future years. While there's less clarity on how high Plains' payout might go in the future, investors get paid well in the meantime.
High yields now with even more income later
All three of these hated dividend stocks offer income seekers excellent starting yields that are more than double the payout of the average stock. Meanwhile, those income streams should rise in the future as these companies continue their expansion and turnaround plans. At some point, those growing dividends should drive their stock prices higher, which could fuel above-average total returns for investors who buy these unloved dividend stocks before the market starts showing them some affection again.
Matthew DiLallo owns shares of Enbridge and Kinder Morgan and has the following options: short March 2018 $17 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Enbridge and Kinder Morgan. The Motley Fool has a disclosure policy.