Energy stocks currently offer some of the best dividend yields. If you are looking for regular and steadily growing dividend income, then consider Enterprise Products Partners (EPD 0.30%), Enbridge (ENB 0.34%), and Kinder Morgan (KMI 1.14%).
Though high dividend yields are generally associated with higher risk, these three stocks are exceptions. Let's see what makes them top dividend stocks to buy right now.
Enterprise Products Partners
You won't find many companies that have raised their payouts for 22 consecutive years and still trade at an 8.1% yield, like Enterprise Products Partners. What's more, the company has performed quite well in a year of widespread turmoil in the energy markets.
Enterprise Products Partners' high yield can likely be attributed to its performance last year or to concerns relating to its future growth. However, neither of these two factors is really a major concern. The pandemic hurt its earnings last year, but only to an extremely limited extent. The company's distributable cash flow for the year fell just 3% from a record of $6.6 billion in 2019.
Another area of concern could be reduced future growth due to lower capital investments. In response to market demand, Enterprise Products expects to spend only $1.6 billion on growth projects this year, down from $3.3 billion in 2020 and $4.5 billion in 2019. Notably, $1.6 billion in spending is for projects that are already sanctioned. Still, including other projects that it may take up, the company doesn't expect to spend more than $2 billion on growth projects in 2021.
The reduced spending is a prudent approach considering the uncertainties that remain related to the pace of demand growth for energy products. Enterprise Products plans to return part of the excess cash to its shareholders through buybacks. The company can always increase capital spending if it finds suitable growth opportunities. In the long term, it is confident of robust growth opportunities due to rising global energy needs.
Enterprise Products Partners is one of the best-placed midstream operators to benefit from a recovery in demand for energy products, due to its huge and diversified asset footprint as well as its strong balance sheet. The stock's 8.1% yield is a steal right now.
Enbridge stock offers a compelling dividend yield of around 6.8%. The Canadian pipeline operator has grown its dividend for 26 years in a row. The company offers oil, liquids, and gas transportation and related midstream services. It also has renewable power generation operations. While Enbridge's gas transmission and distribution operations are largely regulated, its liquids operations are backed by long-term contracts. Such contracts give a lot of stability to Enbridge's earnings.
Further, Enbridge's liquids pipelines are strategically located, resulting in robust demand for their capacity. Moreover, the company expects to place CA$10 billion of growth projects into service in 2021. That should fuel its earnings and dividend growth in the coming years.
Enbridge's debt-to-EBITDA ratio of 4.6 is within its targeted range. A high yield, strong balance sheet, huge asset footprint, fee-based or regulated earnings, and attractive projects backlog make Enbridge an appealing dividend stock.
With a yield of 6.2%, Kinder Morgan is another attractive dividend stock in the energy sector right now. As one of the largest natural gas pipeline operators, Kinder Morgan stands to gain from the expected steady growth of natural gas demand in the long term. The company has steadily grown its payouts since its 2015 dividend cut and plans to raise its dividend by 3% this year.
Though the company's earnings last year were affected by the pandemic and certain asset sales, the impact was minimal. Kinder Morgan's distributable cash flow fell 8% compared to 2019.
Kinder Morgan has taken steps to conserve cash in response to the demand destruction from the pandemic. Although the demand for energy products is improving, it remains lower than its 2019 levels.
Kinder Morgan is generating ample cash flow to easily cover its dividend payments. It is also keeping an eye on opportunities in the renewable energy space, such as renewable diesel transportation or possibly hydrogen transportation in the future. Overall, the company is poised to grow in its traditional natural gas and liquids operations, as well as potentially in the renewable energy space as it evolves.