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3 Dividend Stocks to Buy on Sale

By Matthew DiLallo – Apr 14, 2018 at 7:20AM

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These top-notch income stocks are selling for more than 10% below where they were at the start of 2018.

Several high-yielding dividend stocks have taken it on the chin this year due to a sell-off in the stock market and rising interest rates. That one-two punch has hit pipeline stocks the hardest, with several top-notch companies tumbling by a double-digit percentage since the start of the year. Three that stand out as excellent options to consider buying now that they're on sale are Magellan Midstream Partners (MMP -0.65%), Antero Midstream Partners (AM -0.33%), and Enbridge (ENB -1.59%).

The best yield in nearly a decade

Magellan Midstream Partners has fallen about 12% since the start of this year. Because of that decline, and an 8% increase in its distribution over the past year, the refined products and oil pipeline MLP now yields an attractive 5.9%. That's the highest the yield has been since the aftermath of the 2008 financial crisis.

A shopping cart with cash underneath.

Image source: Getty Images.

Magellan has tumbled this year even though it posted strong fourth-quarter results. The company also unveiled that it has enough expansion projects underway to increase its high-yielding payout another 8% this year and at a 5% to 8% rate in 2019 and 2020. Further, it can achieve that growth while maintaining a comfortable dividend coverage ratio of 1.2 and a top-notch balance sheet, which boasts one of the highest credit ratings in the sector and leverage well below its 4 times debt-to-EBITDA target. That top-tier financial profile makes Magellan an excellent option for those needing a reliable income stream.  

High-octane growth for less

Antero Midstream Partners, meanwhile, has tumbled more than 15% so far this year. That decline comes despite the fact that the gas-gathering MLP has increased its payout 30% over the past year. With its latest increase, Antero Midstream now yields 5.9%, which is by far the highest in its four-year history.

The company expects to continue delivering high-octane income growth over the next several years. It currently anticipates boosting the payout 28% to 30% per year through 2020, with growth targets of 20% annually for 2021 and 2022. Further, the company expects to achieve this growth while maintaining an ultra-conservative financial profile in the near term, covering its payout by at least 1.25 times through 2020 while keeping debt to less than 3 times EBITDA.

A big yield for a bargain-basement price

Canadian oil pipeline giant Enbridge has shed 18% of its value this year, pushing its yield to 6.7%. While the company's cash flow per share did slip last year, that was because it issued a boatload of stock to fund its expansion initiatives. Those catalysts should fuel cash flow growth at a 10% annual clip through 2020, enabling the company to deliver a similar increase in its high-yielding dividend.

If there is a concern with Enbridge, it's that the company's leverage ratio is a bit high at around 5. However, that's because the company is in the midst of a massive expansion phase. The future cash flow from those projects, when combined with some noncore asset sales, should push that metric down to a more comfortable 4.5 by 2020. As that weight lifts, it should help improve Enbridge's valuation, which at just 9.4 times cash flow is well below the 11.9 average multiple of its pipeline peers.

High yields for lower prices

The market sold this trio of dividend stocks off this year for no logical reason. Because of that, income-seeking investors have the opportunity to scoop up some real bargains. Not only can they lock in much higher yields on these top-notch pipeline stocks, but they will also benefit from the growth the companies expect to deliver over the next few years, which should result in lucrative total returns. 

Matthew DiLallo owns shares of Enbridge and has the following options: short June 2018 $25 puts on Antero Midstream Partners. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Enbridge Inc. Stock Quote
Enbridge Inc.
$37.10 (-1.59%) $0.60
Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
$47.51 (-0.65%) $0.31
Antero Midstream Corporation Stock Quote
Antero Midstream Corporation
$9.18 (-0.33%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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