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3 Top Dividend Stocks to Buy in 2020

By Rekha Khandelwal - Updated Jan 22, 2020 at 1:19PM

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These three dividend stocks in the undervalued energy sector offer solid yields. Moreover, growing cash flows support their impressive dividend growth.

With the U.S. markets near their all-time high, trade and geopolitical uncertainties have added to investors' concerns of a sell-off. While you cannot control what happens in China or Iran, you can surely prepare yourself for any scenario with sound investments. A stable dividend income becomes more attractive in such periods of heightened uncertainty.

On the other hand, if the markets continue to shrug off uncertainties, as is the case currently, the undervalued and beaten-down energy sector looks set to make a comeback. So, in addition to attractive yield returns, these three companies, Kinder Morgan (KMI 0.37%), ONEOK (OKE 0.16%), and Enterprise Products Partners (EPD 0.30%), also offer impressive total return potential.

Oil pipeline next to a dirt road.

Image source: Getty Images.

Kinder Morgan

Kinder Morgan offers a yield of 4.7% and plans to raise its dividends by 25% this year. While the majority of the company's operations have shown decent growth recently, its natural gas pipelines segment in particular has shown impressive growth in recent quarters, supported by rising gas production. The segment's natural gas transport volumes have risen by 10% or more year over year for seven consecutive quarters. Kinder Morgan looks set to benefit from the expected rise in natural gas production over the coming years. Moreover, with its Elba liquefaction project, the company will benefit from the rising demand for liquefied natural gas (LNG) in the international markets.

Kinder Morgan's benefits don't end there. With its Gulf Coast Express and Permian Highway pipeline projects, the company is all set to benefit from the prolific Permian Basin production. The company plans to invest $2.4 billion in growth projects in 2020. Finally, the company has come a long way from its high 2014 leverage levels. Kinder Morgan targets a long-term net-debt-to-adjusted EBITDA ratio of 4.5 times. It expects to end 2020 with a ratio of 4.3 times, which is below its long-term target. 

An attractive yield that's supported by growing cash flows combined with reasonable leverage levels make Kinder Morgan a top dividend stock for 2020.

ONEOK

With a yield of 4.9%, ONEOK is another attractive dividend stock in the midstream segment. ONEOK's key advantage is the strategic locations of its assets -- in the Permian, Williston, and Powder River Basins, as well as STACK and SCOOP areas. The company has managed to keep its dividend stable or growing for more than 25 years, primarily due to its fee-based earnings. Moreover, a coverage of 1.3 times means that the dividend income is reasonably safe. 

ONEOK expects its earnings to grow more than 20% in 2020 supported by natural gas liquids (NGL) and natural gas projects. Its projects include assets that will reduce natural gas flaring in the Williston Basin and boost the company's volumes and earnings. ONEOK's top projects including Elk Creek Pipeline, Arbuckle II pipeline, Demicks Lake natural gas processing plants, and MB-4 NGL fractionator will add to the company's 2020 earnings. The company spent around $3.6 billion on growth projects in 2019. 

ONEOK's pipeline of capital projects should continue to keep its strong cash flows, and in turn dividends, growing.

KMI Total Return Price Chart

KMI Total Return Price data by YCharts

Enterprise Products Partners

Enterprise Products Partners offers a very attractive yield of 6.2%. The stock has been underperforming the broader markets for more than a year now, likely due to its MLP structure. Once-hot MLP stocks have clearly fallen out of investors' favor. While many MLPs were forced to cut their distributions, change structure, or shut down after the steep fall in oil prices in 2014, Enterprise Products Partners managed to keep its distributions growing.

A disciplined financial approach was the key factor behind Enterprise Products' growth during the commodity price crisis. It also reflects the strength of the company's operations, which can grow irrespective of the level of commodity prices.

Considering the low appetite for MLPs and the resulting impact on EPD stock price, the company now uses cash generated from operations instead of issuing equity to fund growth. This move has and should continue to prevent a fall in the stock price due to dilution. Enterprise Products spent around $4 billion on capital projects in 2019 and expects to spend $3 billion to $4 billion on growth projects on 2020. 

Enterprise Products Partners has raised distributions for 61 consecutive quarters and its pipeline of growth projects provide visibility for future distribution growth. This makes it one of the best investments for MLP investors. Moreover, the stock's attractive yield and growth prospects make the additional K-1 filing worth the efforts for investors not currently invested in MLPs.

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Stocks Mentioned

Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$19.10 (0.37%) $0.07
Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
EPD
$26.84 (0.30%) $0.08
ONEOK, Inc. Stock Quote
ONEOK, Inc.
OKE
$63.64 (0.16%) $0.10

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

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