Dividend stocks are a great way to start growing wealth. Not only do dividend payers provide passive income, but they have also historically outperformed the S&P 500. That's why investors should consider adding some dividend stocks to their portfolio.
It doesn't take a lot of cash to start investing in dividend stocks. Investors with $1,000 (or less) can build a nice income portfolio by adding the likes of Enterprise Products Partners (EPD -0.41%), Clearway Energy (CWEN -1.20%) (CWEN.A -1.20%), and Brookfield Renewable (BEP -1.66%) (BEPC -0.89%). Here's why our contributors believe these dividend stocks stand out as great income-generating options.
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Unloved energy giant
Reuben Gregg Brewer (Enterprise Products Partners): North American midstream goliath Enterprise Products Partners is offering investors a fat 7.3% distribution yield. The master limited partnership's portfolio of pipelines, storage, transportation, and processing assets rivals just about any of the other big names in the sector. And, as proof of Enterprise's long-term success, it has increased its distribution for more than two decades and counting.
That yield, though, is what's most interesting because it sits near the top end of the partnership's historical yield range. It's not the highest level, but it's high enough to suggest Enterprise is trading hands at a relatively cheap valuation today. There's a good reason for that, given the subdued investment in the energy sector in light of the world's clean energy push. But don't let that scare you: Oil and natural gas are expected to remain important contributors to the energy pie for years to come. Enterprise intends to be there to help move these fuels, and the products into which they get turned.
EPD Dividend Yield data by YCharts
Two key points that should comfort dividend-focused investors are that Enterprise's business is largely fee based (nearly 90% of gross operating margin in 2020) and not tied to commodities, and it covered its distribution by a huge 1.8 times in the first quarter. In other words, this is a very stable business with ample room to deal with adversity while it continues to reward investors with fat distributions. And, given that today's price suggests it is out of favor, now is a good time to act on this industry-leading midstream name. It's likely investors will eventually reward it with a higher valuation.
A high-powered income stream
Matt DiLallo (Clearway Energy): Clearway Energy is a great option for beginning investors looking to collect passive income. The renewable energy producer generates stable cash flow by selling its power under long-term, fixed-rate contracts to utilities and other end users. It uses the bulk of that money to pay an attractive dividend. At a roughly 5% dividend yield, it's well above the market's average of around 1.3%.
However, what makes Clearway Energy stand out is that it offers more than a bond-like income stream. Because of its focus on the fast-growing renewable energy sector, it has lots of upside ahead as it expands its portfolio of cash-flowing clean energy assets.
Overall, Clearway believes it can grow its dividend at a 5% to 8% annual rate over the coming years. Powering that plan is the company's ability to acquire additional cash-flowing clean energy assets. It has a solid financial profile thanks to the cash it retains after paying the dividend and its improving balance sheet, giving it the flexibility to continue making new investments. Meanwhile, its parent company (Clearway Energy Group) is a leading renewable energy project developer with an extensive pipeline of projects under construction and in development. Because of that, Clearway has access to a steady stream of investment opportunities.
When combined with its high current yield, Clearway's growing portfolio, cash flow, and dividend should enable the clean energy company to generate strong total annual returns in the coming years. That makes it stand out as one of the best renewable energy dividend stocks around.
This dividend growth stock is too intriguing to ignore
Neha Chamaria (Brookfield Renewable): With Brookfield Renewable shares shedding nearly 21% of their value in the past six months, long-term income investors have a great opportunity to park cash into a stock committed to paying large dividends year after year. The stock is even more appealing when you consider that Brookfield is a solid play in the red-hot renewable energy industry.
The size and growth of Brookfield Renewable's dividends depends on the amount of funds from operations (FFO) the company can generate. Between 2010 and 2020, it grew FFO per share at a compound annual rate of 10% and has increased its dividend every year since as it expanded its portfolio aggressively into hydropower over the years, and solar and wind more recently. As it primarily sells power under fixed-rate, long-term agreements, Brookfield has been able to generate steady cash flows and dole out regular dividends.
The best part is that Brookfield is already one of the world's leading publicly traded renewable energy companies today, and there's no stopping it. Picture this: As of the end of the first quarter, Brookfield's development pipeline swelled to 27 gigawatts (GW) versus its existing installed capacity of 21 GW. The company is banking on multiple levers to boost FFO through 2025, including:
- Inflation-linked escalators.
- Margin improvement.
- Development of projects in the pipeline.
- Mergers and acquisitions.
So while the first three factors could boost Brookfield's FFO by 6% to 11% through 2025, it could potentially add another 9% growth through mergers and acquisitions. Its dividends should grow alongside those gains. In fact, management is targeting 5% to 9% growth in the annual dividend in the long term. With renewable energy all set to change the energy landscape and Brookfield already a frontrunner in the game with a decent 3% dividend yield, there's little reason to doubt this cheap dividend growth stock's potential.
