Energy stocks have a spotty dividend track record because of the sector's volatility. Many energy companies have reduced or suspended their payouts during an industry downturn to preserve cash.
However, a few energy stocks stand out as rock-solid options for those seeking income. Three of the safest energy dividends are Crestwood Equity Partners (CEQP 1.16%), Enterprise Products Partners (EPD 0.16%), and Kinder Morgan (KMI -0.78%). These midstream companies all generate stable cash flow backed by long-term, fixed-rate contracts, which is just one of the factors that makes them among the sector's safest dividend stocks these days.
The numbers keep getting better
Crestwood Equity currently clocks in with an enticing dividend yield of 8.6%. While a high dividend yield is often a warning sign, that's not the case with this energy company. That's because Crestwood is a master limited partnership (MLP), which requires it to distribute the bulk of its taxable income to investors. Further, those entities have fallen out of favor with investors in recent years, which has weighed on their valuations, pushing up dividend yields across the sector.
Overall, Crestwood backs its big-time payout with strong financial metrics. The company grew its earnings and cash flow by double digits during the second quarter, putting its payout on a firmer foundation. On top of that, the company recently agreed to sell a natural gas pipeline system to Kinder Morgan, bringing in cash to repay debt. That allowed the company to achieve its 3.5 to 3.75 debt-to-EBITDA leverage target.
Crestwood is currently on track to generate enough money to cover its dividend by 2.2 to 2.4 times this year, meaning it will produce enough free cash to finance its capital program with about $150 million to $180 million to spare. Since it already has a strong balance sheet, the company expects to use that money to buy back up to $175 million of its dirt cheap equity, further improving its conservative coverage ratio.
Steady as it goes
Enterprise Products Partners is another MLP with a rock-solid distribution. The company recently reported solid second-quarter results, producing $1.6 billion in distributable cash flow. That was enough money to cover its 7.7%-yielding distribution by 1.6 times, enabling it to retain nearly all the funds needed to finance its expansion-related spending during the quarter.
The MLP compliments that strong coverage profile with a top-tier balance sheet. It has investment-grade-rated credit and a low leverage ratio at 3.24 at the end of the second quarter, which is below its 3.5 target. That gives the company ample financial flexibility. Its flexibility will only improve as Enterprise winds down its current expansion phase, which will see growth-related spending fall from $1.7 billion this year to $800 million next year. As such, its payout will become even safer.
Using its financial strength to expand
Kinder Morgan's recent second-quarter report further confirmed the safety of its dividend. The pipeline giant is on track to generate enough cash to cover its 6.1%-yielding dividend and expansion program with $1.9 billion to $2.1 billion to spare this year -- though that's due in part to a monster first quarter as it took advantage of opportunities as winter storms hit Texas earlier in the year.
Thanks to that strong showing, Kinder Morgan's leverage ratio is on track to end the year below 4.0 times debt-to-EBITDA. That's given it the financial flexibility to go on a shopping spree. It not only bought Stagecoach from Crestwood but also recently purchased a renewable natural-gas producer. Those deals will help grow its cash flow in the future, providing even greater support for its dividend.
Great options for dividend investors
Crestwood, Enterprise Products, and Kinder Morgan offer investors big-time dividends. Even better, those payouts are on some of the safest foundations in the energy sector because these companies generate stable cash flow and have conservative financial profiles. That combination makes them great options for income investors.