It is hard to find good high-yield dividend stocks when the S&P 500 Index is trading near all-time highs and offers up a miserly 1.75% yield. But Royal Dutch Shell (RDS.B +0.00%) and Enterprise Products Products (EPD +0.37%) both have 6%-plus yields, and a lot of promise. Here's why you should take a second look at these out-of-favor energy stocks today.
1. Shifting slowly cleaner
With a roughly $220 billion market cap, Royal Dutch Shell is one of the largest integrated energy companies on the planet. Its business spans from the oil well to the gas pump, with a whole lot in between. The European company's size and reach are important, because they mean that Shell can put money to work where it sees the best opportunities. And when one portion of the company is struggling, there are other areas that will likely be doing better to help offset the pain. That's valuable, since Shell's core products, oil and natural gas, are commodities prone to volatile price swings.
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Right now, with oil prices low and global warming in the headlines, it's a tough time to love an energy company -- but don't be too hasty to dismiss Shell. As the CEO has pointed out, the world still needs these energy sources, so someone needs to produce them. Shell is also more than just oil and gas. It has been investing heavily in the ESG friendly electricity space, with plans to spend up to $3 billion a year on this business through 2025. That includes more traditional electric facilities, as well as renewable power assets. While that spending amounts to just 10% or so of the company's planned capital investments, the end goal is to thoughtfully create a new division that can stand toe-to-toe with Shell's energy operations.
The company, meanwhile, has the financial strength to achieve its aims. Leverage is higher than that of more conservative peers like ExxonMobil and Chevron, with long-term debt accounting for roughly 30% of the company's capital structure. However, that's not an unreasonable number, and Shell is carrying around $18 billion in cash on its balance sheet as a safety valve. Shell is not playing loose and fast with its balance sheet.
With a huge 6.6% yield, a large, solid financial foundation, and a diversified portfolio of energy assets that will increasingly include electricity, Shell is worth a deep dive for dividend investors in search of high yields.
2. Price isn't important
Enterprise Products Partners doesn't really have the same clean energy feel to it, but it also doesn't have to worry about the volatile prices of oil and natural gas. That's because this $60 billion market cap master limited partnership is one of the largest midstream players in North America. Basically, it owns the pipelines, processing facilities, and transportation assets that help move oil and gas, and the products they get turned into, around the world. Roughly 85% of its gross operating margin is fee based.
RDS.B Dividend Yield data by YCharts
This is a key distinction to keep in mind. So long as there is demand for oil and gas (which isn't going away anytime soon), the vital infrastructure assets Enterprise owns will be used to move these key energy sources. And it doesn't matter what the price of the products passing through the system are trading at -- Enterprise gets paid for the use of the assets. In fact, much of its revenue is backed by long-term contracts with built-in price increases.
That, however, is just the start of the story.
Enterprise is not just an industry giant, it is also incredibly diversified, so it has multiple levers to pull as it looks to grow -- right now it has around $9 billion of growth projects on the books. And it happens to be among the most conservatively financed midstream players, with a modest financial debt to EBITDA ratio of roughly 3.4 times. Its 6.5% distribution yield, meanwhile, is covered by distributable cash flow by about 1.7 times. That's a huge margin of safety -- 1.2 times is considered strong coverage in the midstream space.
ESG investors probably won't find too much to like about Enterprise, but those interested in a reliable income stream will. On that note, it's worth highlighting that the partnership has increased its distribution annually for more than two decades at a roughly mid-single-digit annualized rate over time. That's more than enough to keep investors ahead of inflation, which has historically tended in the 3% range. There's a lot for dividend investors to like here.
Big yields, big stocks
Shell and Enterprise are two of the biggest players in the spaces they serve. They are both investing for the future, and working off of strong financial foundations. And, at the same time, they are paying investors well, with 6%-plus yields. Before you dismiss these high-yield giants because they are in the out-of-favor energy sector, you should dig in a little bit deeper. Shell is working to "clean up" its business, and oil prices aren't all that important to Enterprise's top and bottom lines. Take the time to do a little more research and you might find you want to add one or both of these to your income portfolio.
