Many of the best dividend stocks share three common features. First, they generate relatively stable cash flow that comes from recurring revenue streams. Second, they leave themselves plenty of cushion by only paying out a conservative portion of that money via the dividend. Finally, they have a solid balance sheet that gives them the financial flexibility to make it through tough times.
While several dividend payers fit that criteria, three that do so while boasting a well above average current yield are TerraForm Power (TERP +0.00%), Medical Properties Trust (MPW +0.64%), and MPLX (MPLX 0.78%). Here's a closer look at what puts this trio among the top dividend stocks in their respective sectors.
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Powerful dividend growth
TerraForm Power operates wind and solar power generating facilities in North and South America as well as Europe. These assets not only produce relatively steady renewable energy but stable cash flow. That's because TerraForm Power sells about 95% of its power under long-term contracts, which locks in a very predictable revenue stream for the company to support its 6.6%-yielding dividend.
However, yield alone isn't what makes TerraForm Power a top dividend stock. What pushes it past its peers is a strengthening financial profile. First of all, the company only plans on paying out between 80% to 85% of its annual cash flow, while most yield-focused renewable peers distribute more than 90% of their cash flow each year. By retaining some cash, TerraForm can reinvest that money into high-return expansion projects to help it deliver on its plan to raise its payout by 5% to 8% annually over the next five years. Finally, while TerraForm Power, like most of its renewable peers, doesn't currently have an investment grade balance sheet, its credit metrics have improved dramatically in the past year and are on their way toward achieving investment-grade levels in the future. That combination of a conservative payout ratio and a commitment toward having a top-tier balance sheet are what make TerraForm power a top dividend stock in the renewable sector.
A very healthy dividend
Medical Properties's name suits it well since the company owns hospital real estate in both the U.S. and Europe. These properties supply the company with a steady income stream backed by long-term leases and mortgage agreements, with that cash flow supporting its 7.8%-yielding dividend.
That yield alone, though, isn't what makes Medical Properties Trust a top stock among Real Estate Investment Trusts (REITs). What pushes it up toward the top are its financial metrics. For starters, the company only pays out about 70% of that cash flow via the dividend. That's a sector-leading metric and quite conservative considering that most other REITs have payout ratios above 90%. Meanwhile, the company has a strong balance sheet. While its leverage ratio ended last year at 5.8 times debt to EBITDA, which is above the high end of its 5.5 times target due to a needle-moving acquisition last year, it's working on completing some joint venture transactions to get leverage back below its target level this year. Those factors suggest that Medical Properties Trust's high yield is as healthy as they come.
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Among the leaders
Pipeline and processing company MPLX also generates the bulk of its revenue from predictable sources like fee-based contracts. Further, the master limited partnership (MLP) maintains a conservative distribution coverage ratio that averaged 1.28 times last year, well above the less than level of most other MLPs, at 1.1 times. Meanwhile, it has one of the lowest leverage ratios among large MLPs at 3.6 times debt to EBITDA, when most peers are comfortable with that ratio above 4.0 times.
Those factors suggest that MPLX's 6.9%-yielding distribution is on rock-solid ground. In fact, thanks to its conservative coverage ratio, strong balance sheet, and in-process growth projects, MPLX expects to increase its distribution 10% this year. Meanwhile, with additional expansions under way, MPLX should have no problem continuing to grow its payout at a healthy rate in the coming years.
Stable income streams for the long haul
While their high-yields certainly catch the eye, what sets this trio apart from rivals is that their financial metrics are at or near the top of their sectors. Because of that, they should have the financial strength to maintain their lucrative payouts for the long term, making them top stocks for income seekers to consider holding.
