Want to get paid for doing no work? Good news: Once you've purchased a dividend stock -- particularly a dividend stock that has a reliable history of solid payouts -- a lot of the hard work is done, and you can sit back and wait for the stock to pay you every quarter.
Of course, you'll have to do some work up front and figure out which dividend stocks to buy.
Let's start right now by looking at dividend stocks Magellan Midstream Partners (MMP +0.00%), Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B), and Energy Transfer Partners (ETP +0.00%). All three have been paying dividends -- and better yet, increasing them -- for a long time. Here's where they stand today.
The oil and gas industry is a great place to look for top dividend stocks. Image source: Getty Images.
Structured to pay
Magellan Midstream Partners' current yield of about 5.5% is juicy, but it comes with the territory. Magellan is an energy master limited partnership, or MLP, and in exchange for favorable tax treatment, MLPs are required to pay out almost all their net earnings in the form of distributions to their unitholders. Investors can reap big gains by buying and holding MLPs.
However, there are a couple of trade-offs. Because of that special tax treatment, MLP investors have a few extra hoops to jump through come tax time, which can be burdensome. But the payouts can certainly be worth the extra red tape, and Magellan's payouts have been growing for a long time. In fact, the company has increased its distribution nearly every quarter since going public in 2001 -- with the only exceptions during the 2009 financial crisis.
Better yet for investors, Magellan's unit price -- MLP-speak for share price -- is up about 18% over the past five years, in spite of recent turbulence in energy markets. Other MLPs haven't fared so well, but Magellan's conservative management style and top-notch balance sheet have helped keep the company running smoothly.
Magellan's high yield and solid track record make it a solid choice for dividend investors.
Bigger can be better
Although Magellan is a company you may never have heard of, you've definitely heard of the next company on the list, oil major Royal Dutch Shell. Besides being a filling station icon, Shell is also one of the largest companies in the world, and it's taking steps to ensure it stays that way.
In 2017, Shell divested a number of underperforming assets, with a goal of dropping some $30 billion in assets by the end of 2018 to improve its margins even further. Meanwhile, it has expanded its liquefied natural gas business, a market it expects will grow even faster than oil in coming years. That should help keep the company strong even if the oil market softens five or ten years down the road.
The oil market is currently showing no signs of softening. Brent Crude prices -- which have stayed above $60 per barrel all year -- are currently sitting around $74 per barrel. Thanks to the stringent cost-cutting Shell did during the oil price downturn, the company's most recent first quarter 2018 was an earnings bonanza, with net income up 67% year over year, to $5.9 billion.
Shell's current dividend yield is almost as high as Magellan's, at about 5.3%, with none of the cumbersome MLP tax issues. Now looks like a good time to invest in this global oil giant before it grows even bigger...and even better.
A massive yield
Dividend yields above 5% are good, but a yield above 12% sounds positively amazing! That is, if the yield looks sustainable. And luckily for investors in another energy MLP, Energy Transfer Partners, that company's current 12.4% yield is looking pretty stable right now.
That wasn't always the case, though. Throughout much of 2017, the company's distribution coverage -- the amount of cash it churned out compared to the amount it needs to pay its distribution -- was razor thin. But then, Energy Transfer Partners reported a distribution coverage ratio of 1.3 times in its fourth-quarter 2017 earnings report: a very comfortable margin.
Another issue facing Energy Transfer Partners was a highly leveraged balance sheet, which isn't unusual for an energy infrastructure MLP. Luckily, the partnership was able to convert some of its more expensive debt into less expensive debt, as well as pay down some debt altogether through asset sales. Finally, it's contemplating a big change to its management structure to accelerate growth.
While the risks are still there for Energy Transfer Partners, the big yield it's paying seems more than enough to justify them.
Investor takeaway
A dividend is about more than just getting a check every quarter. Historically, dividend-paying stocks have tended to outperform non-dividend-paying stocks over the long term. But all dividends are not created equal. Yields vary, and reliability and dividend history are important to make sure the dividend isn't yanked away from you.
Luckily, Magellan, Shell, and Energy Transfer Partners all have high yields and long payout histories. You can feel secure adding any of these dividend stocks to your portfolio.
