Dividend investors have had to be much more choosy over the past few years. While the stock market has been roaring for nearly a decade -- at least before the recent decline -- that has sent many of the best-known dividend stocks soaring higher but pushing their yields steadily lower. That's not a great combination for investors looking for dividend stocks to buy.
The market has started to create some wonderful opportunities, as rising interest rates and concerns about global economic growth fuel uncertainty. And while many investors get caught up in the short-term noise, long-term investors willing to ride out the market's ups and downs while they enjoy a solid dividend could do well to buy when others are selling.
Three excellent examples are Brookfield Infrastructure Partners L.P. (BIP -2.26%), Magellan Midstream Partners, L.P. (MMP), and Schlumberger Limited (SLB -0.21%). Not only do they pay above-average yields -- 4.8%, 6.4%, and 4.4%, respectively -- but they also offer substantial capital growth potential and a high likelihood that their payouts will be increased regularly for years to come.
Keep reading to learn why three Motley Fool contributors identified these particular stocks as top picks.
A fortress-like business on sale
Jason Hall (Brookfield Infrastructure Partners): When it comes to dividend stocks, there are a few boxes investors should make sure they can check off: recession-resistance; inflationary pressure; high barriers to competitive entry; difficult or impossible to replace. Brookfield Infrastructure checks every one.
Brookfield Infrastructure owns critically important infrastructure assets that transport and store water, telecommunications, energy, freight, and passengers. Things like ports, water, power, and natural gas infrastructure, roads, and fiber optic and cellular towers. This is the infrastructure that makes global commerce work, and often the end user never even considers how it is supplied or managed. Furthermore, people and businesses use them, no matter the economic environment.
Yet over the past year, Brookfield's shares are down 13% as the partnership has sold off some of its assets, causing its results to decline. But management has a plan: It's using those sales to raise cash to invest in better-returning opportunities.
And the market's move to sell out of Brookfield Infrastructure on this recent weakness is typical short-term thinking. For long-term investors, it's created a great opportunity to own a wonderful business at a solid value. At recent prices, Brookfield Infrastructure yields almost 4.8% and it trades for less than 13 times expected 2018 funds from operations.
Lastly, investors can count on Brookfield Infrastructure to grow the distribution. The long-term goal is 5%-9% annual payout increases, and management has crushed that goal. Over the past five years, the dividend is up 64%, and it's up an incredible 166% over the past decade. With excellent management and an incredible long-term prospects, Brookfield Infrastructure is one of my favorite stocks yielding over 4%.
Rock-solid with room to grow
Matthew DiLallo (Magellan Midstream Partners): Magellan Midstream Partners operates the longest refined petroleum products pipeline system in the country, supplying America's midsection with the fuel needed to drive the economy forward. In addition, it also transports crude oil and ammonia, as well as storing and exporting petroleum products. The company primarily generates fee-based income from these activities, which supplies it with very steady cash flow, roughly 80% of which it distributes to investors in a payout that currently yields 6.4%.
Magellan Midstream takes the money it doesn't return to investors, as well as using its strong balance sheet, to invest in expanding its midstream business. The company currently has $2.5 billion of growth projects under construction, including a new oil pipeline out of the Permian, which should drive its cash flow higher over the next two years. Because of that, Magellan Midstream anticipates that it can increase its distribution to investors by 5% to 8% in both 2019 and 2020. Meanwhile, the company is working on more than $500 million of additional growth projects -- including recently proposing to expand an existing oil pipeline from Colorado to Oklahoma as well as building a new one from Oklahoma to Houston -- to drive growth in future years.
With a business that generates steady cash flow and a solid financial profile, Magellan Midstream's current high-yielding payout is on solid ground. Add that income stability, and it's one of the top income stocks around.
Helping drill dividends out of the ground
Dan Caplinger (Schlumberger): The stock market correction has revealed a lot of opportunities in the dividend stock realm, and few have been more plentiful than in the energy sector. With prices of crude oil on the decline, stocks of many oil and gas exploration and production companies have been under pressure, and that's carried over into the realm of oil services stocks like Schlumberger.
Even as an industry leader in providing the materials, equipment, and specialized services needed to help producers get up and running, Schlumberger faces the same threat from what's emerging as a potential glut in the oil market. Those concerns have been particularly acute in the U.S., where dramatic increases in production capabilities have resulted in record output and have sent prices of domestic crude to extremely large discounts compared to global markets.
Yet Schlumberger itself is optimistic about the prospects for a quick turnaround for oil. As CEO Paal Kibsgaard recently told shareholders, international production still accounts for four-fifths of total supply, and many energy producers globally have taken the focus away from maximizing current output in favor of a longer-term perspective that allows them to be more opportunistic. Moreover, even if innovative production in areas like shale oil plays keeps climbing, Schlumberger will be in position to serve that growing market.
With share prices having slid almost 40% so far in 2018, now's a good time to start looking at Schlumberger's value proposition as well as its 4.4% dividend yield.