Up, up, and away! No, it's not just for birds, planes, and superheroes -- or for Disney's box office take this holiday season -- it's how your net worth can soar with top dividend stocks in your portfolio!
Like choosing the perfect gift, though, picking out the perfect investment is about more than just a price tag or online reviews. The best dividend may not be a double-digit yielder. In fact, three of the best picks paying out more than 5% include Royal Dutch Shell (RDS.A) (RDS.B), Enterprise Products Partners (EPD 0.16%), and ExxonMobil (XOM -0.65%).
Here's why these companies make the cut.
Reluctance to cut
An ultrahigh yield doesn't mean much for an investor if it promptly gets slashed because it's unsustainable. But some companies that have regularly increased their payouts for years end up having to make that unpopular -- and frankly, self-destructive -- choice because their business model just can't support it.
This is especially true in the energy industry. When oil and gas prices drop, it can kill a company's cash flow. Without enough cash flowing into the coffers, a company has to choose between taking on debt to sustain its dividend payments, issuing more shares (which dilutes shareholder value), and selling assets. Companies that already have high debt and depressed share prices may not have any choice but to trim the payout.
That's why oil major Royal Dutch Shell has been an excellent dividend stock over the long term. It's long been a top yielder among the oil majors (and is currently tied for the top spot with BP: both sport yields of 6.6%). While it hasn't been as routine about upping its payout as its peers -- in fact, it hasn't raised its dividend since 2014 -- it has maintained its dividend through thick and thin, even during the oil price downturn of 2014-2017.
That crisis was the worst the industry had seen in decades, but Shell's massive size, diversified operations, and solid balance sheet enabled it to use leverage to maintain its payout even as crude oil prices tumbled to less than $30 per barrel. That kind of commitment to shareholders shows Shell to be an excellent and reliable choice for a dividend-focused portfolio.
Shell may not have upped its dividend since 2014, but those who like consistent payout growth can turn to a different corner of the energy industry: midstream master limited partnerships (MLPs). Technically, MLPs offer "distributions" as opposed to "dividends," but the upshot is the same: a quarterly payout to investors.
MLP Enterprise Products Partners has increased its distribution every quarter for the past 60 consecutive quarters. That's right: an increase every quarter for the past 15 years (and at least annually for the past 22 years)! That's part of the reason that Enterprise's yield now outpaces Shell's: 6.8% to 6.6%.
As for whether that yield is sustainable, evidence suggests that it is. The midstream (oil and gas transportation and storage) sector is notorious for high levels of debt, thanks to the huge up-front costs of constructing pipelines, terminals, and storage facilities. But Enterprise's debt load is just 3.4 times EBITDA. That's well below the 4.0 times that's seen as the industry's upper advisable limit. The major debt ratings agencies agree, assigning Enterprise investment-grade ratings.
As for distribution coverage, Enterprise is a cash-generating machine, churning out enough cash to cover its payout 1.7 times over. That's about as reliable a payout as one could hope for, and Enterprise's conservative management team is committed to keeping those metrics sustainable over the long term. Investors should feel safe adding Enterprise to their dividend portfolios.
The best of both worlds
But maybe you're not that interested in an MLP; they can be problematic come tax time and aren't compatible with some retirement accounts. And perhaps you're not a huge fan of a company like Shell that doesn't regularly boost its dividend. Well, there's one company that isn't an MLP, but has Shell's advantages of scale and size, and has achieved Dividend Aristocrat status thanks to its 37 consecutive years of dividend increases.
That company is ExxonMobil, and just this year -- for the first time this century -- its annual dividend increases have pushed its yield up to the 5% mark. The share price hasn't seen much movement this year, rising only 0.7% so far in 2019.
Investors have been skeptical of Exxon's stock thanks to production declines in recent quarters. However, Exxon has made investments in promising production fields -- including offshore Guyana in South America -- and has the second-largest refining capacity in the world. Plus, like Shell, it didn't cut its dividend -- and in fact, increased it -- during the oil price downturn of 2014-2017.
Scooping up shares of a top company and reliable dividend payer while it's down makes good sense, and investors may want to act now to pick up stock in ExxonMobil.
Top dividends mean low-risk dividends
These three companies currently offer yields in the 5%-7% range. While it's true that investors can find higher-yielding dividends than these in the energy sector, those dividends often come with significantly higher risk. And, of course, a high dividend that gets slashed usually takes the share price down with it, resulting in a double whammy for the income investor.
To truly be considered a "top" dividend, a stock has to demonstrate reliability and sport a decent yield. Royal Dutch Shell, Enterprise Products Partners, and ExxonMobil all make the cut thanks to their longtime commitments to rewarding shareholders with regular payouts. Investors should feel safe parking their money here and watching it grow.