Dividend investors are always looking for stocks offering attractive yields at low risks. Energy stocks currently offer some of the highest dividend yields. But while selecting stocks in this volatile sector, you should also consider the risks associated with the high yields. The best approach is to go for fundamentally strong companies with proven track records. Here are three such stocks yielding more than 5% that look like compelling buys right now.
Energy stocks' elevated yields, as seen in the graph above, likely reflect the market's concerns relating to the role of oil and gas as energy sources in the long term. Additionally, they reflect the oversupply of oil and gas, even as demand remains subdued due to COVID-19 as well as increased use of renewables.
Saudi Arabia's additional production cut for February and March should provide some respite to the oversupplied oil markets. At the same time, demand is expected to recover because of the vaccine rollout and possible economic stimulus. While that's supporting oil prices in the short term, oil and gas are expected to play a crucial role in the long term as the world transitions toward renewable sources. Fossil fuels would be needed to meet the growing demand for low-cost energy, especially from emerging nations. Moreover, they are expected to find applications in the growing petrochemicals industry, which doesn't have a viable alternative for fossil fuels yet.
So, even while the oil and gas sector continues to consolidate, strong and diversified companies should see robust demand for their services. Enbridge, in particular, expects to grow its per-share distributable cash flow by an average of 5% to 7% through 2023. The company is working on several growth projects, which are backed by commitments from customers. It plans to complete roughly 10 billion Canadian dollars' worth of growth projects in the next three years.
Enbridge has raised its dividends for 26 consecutive years. With a strong balance sheet, Enbridge is a great dividend stock to buy for the long term.
Enterprise Products Partners
For dividend investors open to investing in MLPs, Enterprise Products Partners (EPD 0.15%) is probably the best option. The stock currently offers a compelling 7.7% yield. The diversified midstream company has operations across oil, natural gas, and refined products. It has raised its distributions (think dividends that MLPs pay) for 22 years in a row.
Enterprise Products Partners' biggest positive is its strong balance sheet. Its debt-to-EBITDA ratio of 3.7 is one of the lowest among its peers. The company's distributable cash flow was 1.6 times its distributions for the first nine months of 2020. This bodes well for the continuity of its distributions.
Another key strength of Enterprise Products Partners is its diversified fee-based operations. These generate relatively stable cash flows even when commodity prices are volatile. Around 87% of Enterprise Products' earnings are fee-based. Like Enbridge, Enterprise Products has several ongoing growth projects. It expects to spend $1.6 billion on sanctioned projects in 2021. Moreover, it is witnessing robust demand for its natural gas liquids (NGL) transport and export infrastructure.
Diversified fee-based earnings, conservative leverage, ample distribution coverage, and attractive growth opportunities make Enterprise Products Partners a convincing buy for dividend investors.
Kinder Morgan's (KMI 1.19%) infamous 75% dividend cut in 2015 still haunts the stock and the company seldom is mentioned without the cut being discussed as well. However, it has come a long way since then. A key reason that forced the company to slash payouts was its high debt load of nearly $45 billion. Kinder Morgan has reduced its net debt by $10.8 billion since the first quarter of 2015. The company is also now generating enough cash to cover its dividends. In 2021, it expects to generate $1.2 billion in excess distributable cash flow (DCF) after planned dividends and capital expenditures. This positions it well to grow its dividends as earnings grow. The company plans to raise its dividend by 3% in 2021, after a 5% increase in 2020.
For the 2020 full year, Kinder Morgan's DCF was 8% lower than in 2019, in line with its updated guidance. The decrease was due to the effects of the coronavirus pandemic on energy demand and commodity prices, as well as to certain asset sales in 2019. Kinder Morgan expects its 2021 DCF to be 3% lower than in 2020, primarily due to lower recontracting rates on certain pipelines, as well as lower crude volumes and prices.
Though Kinder Morgan's performance seems to be impacted by sector headwinds, the positive point is company's capital discipline. Kinder Morgan spent roughly $1.7 billion on capital projects in 2020, but the company expects to spend only $800 million on growth projects in 2021. While that seems to restrict cash flow growth to an extent, it is the wise thing to do in light of the current demand environment.
In terms of growth, the demand for natural gas is expected to grow at a steady pace in the long term, benefiting Kinder Morgan. Moreover, the company is eyeing opportunities in the transition toward cleaner sources of energy. These include blending and transport of renewable diesel and, potentially, hydrogen and other fuels. Kinder Morgan's strong asset base positions it well to capture such opportunities. In short, the stock's 6.5% dividend yield looks sustainable, too.