The dividend yield on the S&P 500 is down to a 20-year low of less than 1.3%. That's due to several factors, including low interest rates, a strong stock market, and a preference by many companies for share repurchases over dividends.
However, yield-seeking investors still have a few attractive options in this environment. We asked some of our contributors for their top dividend ideas for yield and they tapped Enbridge (ENB -0.85%), Atlantica Sustainable Infrastructure (AY -0.58%), and Energy Transfer (ET 0.72%). Here's why this trio stands out for more than just their juicy dividend yields.
Plenty of growth ahead
Reuben Gregg Brewer (Enbridge): Finding a fat yield is easier than finding a great company that happens to have a fat yield. But Canadian midstream giant Enbridge is just such a find. Not only does that stock offer a generous 6.7% dividend yield, but the dividend has been increased annually for 26 consecutive years.
You don't get into the Dividend Aristocrat space by accident; Enbridge runs a great business and runs it well. Roughly 54% of EBITDA comes from oil pipelines, 29% from natural gas pipelines, 14% from a natural gas utility business, and 3% from renewable power operations. The vast majority of its business is fee based or regulated, which provides for consistent performance regardless of commodity price volatility. And it is positioning itself to use cash flows from dirtier carbon energy sources to invest in cleaner options, so it can change along with the world around it.
Growth, meanwhile, comes largely from construction. And on that front, Enbridge shines, with plans to deploy between $4 billion and $6 billion in cash on an annualized basis for the foreseeable future. That spending, in turn, is expected to drive 5% to 7% distributable cash flow growth (dividend growth should trail along slightly behind that). In other words, high-yield Enbridge has a great history and likely a great future, too. The best part, however, could be that the yield is toward the high end of its historical range, suggesting that the stock is on sale today.
A sustainable yield
Matt DiLallo (Atlantica Sustainable Infrastructure): Atlantica Sustainable Infrastructure owns a globally diversified portfolio of renewable energy, storage, efficient natural gas, transmission lines, and water assets. These infrastructure businesses generate stable cash flow backed by long-term contracts. That enables Atlantica to pay an attractive dividend that currently yields 4.5%.
The infrastructure company set a target to grow its cash flow per share at a 5%-8% annual rate through at least 2024. Three factors power Atlantica's outlook:
- Organic growth: Things like rate escalators on existing contracts, operational improvements, expanding existing assets, and investing more in existing holdings by buying out partners should boost its bottom line by 2% to 3% per year.
- Development: Investments made in-house or through partnerships to develop new infrastructure should grow its cash flow per share at a 2% to 3% annual rate.
- Third-party acquisitions: Outside acquisitions should add another 1% to 2% to its earnings each year.
Overall, Atlantica is aiming to invest $300 million per year, which should support its growth plan. The company has a solid financial profile to support this spending rate.
That growing cash flow should enable Atlantica to continue raising its dividend. It has increased its dividend several times over the past few years, growing the payout at a 12% compound annual rate since 2018. While it likely won't raise the dividend quite that fast in the future, it could expand it in line with its cash flow growth forecast. Add that upside to its already attractive income stream, and Atlantica stands out as a compelling option for income investors in today's low-yield environment.
This stock's 6.3% yield is well supported
Neha Chamaria (Energy Transfer): Energy Transfer is one of the largest midstream oil and gas companies in the U.S., with a pipeline network of more than 90,000 miles across 38 states. The stock currently yields a handsome 6.3%, and the company wants to ensure it can generate enough cash flows to support that yield.
As it is, most of Energy Transfer's cash flows come from fee-based contracts that eliminate sensitivity to volatile oil prices to a great extent, and the company is also structured as a master limited partnership. Combined, the two factors mean stable and regular dividends for shareholders.
Right now, Energy Transfer is aggressively repaying debt and is about to make a big growth move by acquiring Enable Midstream (ENBL) in an all-stock $7.2 billion deal in the coming months. Once complete, the acquisition is expected to strengthen Energy Transfer's footprint considerably along the U.S. Gulf Coast region and Anadarko Basin in Oklahoma, and it should be immediately accretive to the company's cash flows. At the same time, with such a big acquisition behind it, Energy Transfer's growth capital expenditure should taper next year onward, which should free up even more cash. In short, Energy Transfer's plans to grow cash flows should be good enough to support regular dividends and the high yield.