Stocks that pay a growing dividend tend not only to outperform the market but to do so with less volatility. That's why risk-averse investors should consider stocking their portfolio with companies that have a high probability of paying a growing income stream in the years to come. Three top options worth considering are pipeline giants Enterprise Products Partners (NYSE:EPD), TransCanada (NYSE:TRP), and Magellan Midstream Partners (NYSE:MMP).
The cream of the crop
Enterprise Products Partners has all the qualities investors could want in a low-risk dividend stock. The master limited partnership (MLP) operates a vast pipeline network as well as a variety of other energy infrastructure assets. Because of that, the company makes most of its money by collecting a steady stream of fees backed by long-term contracts, which provides it with very stable cash flow. On top of that, Enterprise has one of the strongest balance sheets among MLPs, backed by the highest credit rating in the sector and low leverage metrics. Further, the company currently generates enough cash to cover its 6%-yielding payout by a very comfortable 1.5 times, which is well above the 1.2 times average of most MLPs. That provides it with significant excess cash that it reinvests in expansion projects.
The company's conservative financial profile has enabled it to increase its lucrative distribution to investors in each of the last 56 consecutive quarters. That streak isn't showing any signs of coming to an end, since Enterprise recently completed $1.1 billion of expansion projects and currently has another $5.2 billion under construction. With the company able to self-fund the bulk of that growth, it should have no problem continuing to increase its high-yielding payout each quarter for years to come.
A high yield with a high growth rate
Canadian pipeline giant TransCanada currently offers investors an attractive 4.9%-yielding payout. Like Enterprise Products Partners, the company backs that income stream with a low-risk business model. Overall, fee-based contracts and other predictable sources provide more than 95% of the company's earnings. On top of that, TransCanada has a strong balance sheet with an A-level credit rating. Finally, the company covers its high-yielding dividend with cash flow by 1.6 times, which is very conservative for a pipeline stock. Those factors put the company's high-yield payout on rock-solid ground.
Meanwhile, TransCanada has clearly visible growth coming down the pipeline. The company currently plans to place 10 billion Canadian dollars ($7.7 billion) of expansion projects into service by year end, which is part of a CA$28 billion ($21.6 billion) near-term capital program. These investments should support 8% to 10% annual dividend growth through 2021. Meanwhile, the company has more than CA$20 billion ($15.4 billion) of longer-term expansions under development, which could enable it to continue increasing its high-yield payout at a high rate for years to come. That low-risk income growth makes TransCanada a top option to consider owning for the long haul.
A model of stability
Refined products–focused MLP Magellan Midstream Partners has increased its distribution to investors 65 times since its IPO in 2001. Driving the company's growth is its low-risk business profile. For starters, Magellan ties Enterprise Products Partners for the best credit ratings among MLPs. In addition to that, the company generates very predictable cash flow, since more than 85% of its earnings comes from predictable sources like fee-based contracts. Further, the company has routinely maintained a conservative distribution coverage ratio greater than 1.2 times.
Magellan currently has $2 billion of expansion projects underway, which it expects to internally finance with retained cash flow, incremental borrowings on its credit facility, and the proceeds from a recent asset sale. Because it has the funding lined up to complete these projects, the company has clear line of sight to increase its high-yielding distribution at a 5% to 8% annual pace through 2020. That low-risk income growth makes Magellan a great option for investors.
Low-risk stocks for the long haul
Enterprise Products Partners, TransCanada, and Magellan Midstream Partners all have strong financial profiles and visible growth prospects. Those two factors dramatically lower their risk profiles, which increases the probability that they can generate positive returns in the coming years, especially when factoring in their growing dividend streams. That's why these three energy stocks are great options for investors seeking lower-risk returns.