Dividend stocks can be great wealth creators. Since 1973, dividend payers have outperformed stocks in the S&P 500, according to data from Ned Davis Research and Hartford Funds. However, just because a company pays a dividend doesn't guarantee success. Companies that steadily increased their dividends typically beat the market while those that kept it flat or cut or eliminated their payouts usually underperformed.
Given this distinction, some of our contributors took a critical look at dividend stocks. It led them to highlight two dividend stocks they believe look like good buys -- Crestwood Equity Partners (CEQP) and Enterprise Products Partners (EPD -0.31%) -- and one investors might want to consider selling, in USA Compression Partners (USAC 0.56%).
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Adding a new fuel source
Matt DiLallo (Crestwood Equity Partners): Crestwood Equity Partners pays one of the more attractive dividends in the energy midstream sector. The master limited partnership (MLP) currently yields 8.8%. While a dividend yield that high might set off alarm bells, a closer look at the numbers shows that Crestwood's payout is on solid ground and growing more sustainable by the day.
For example, the MLP generated enough cash to cover its distribution by a comfortable 2.18 times during the third quarter. That left it with the money to cover its capital expenses with room to spare. Because of that, Crestwood was also able to maintain a strong balance sheet. It ended the quarter with a conservative leverage ratio of 3.45 times debt-to-earnings before taxes, interest, depreciation, and amortization (EBITDA).
That gave Crestwood lots of financial flexibility, which it's now using to acquire fellow MLP Oasis Midstream Partners (OMP) for $1.8 billion. That deal will further enhance its asset base and grow its cash flow while maintaining conservative financial metrics. Crestwood expects distribution coverage to remain above two times while leverage will stay below 3.5 times debt-to-EBITDA. Because of that, Crestwood plans to boost its already attractive distribution by 5% when the deal closes next year.
The Oasis Midstream deal provides a blueprint for future growth as Crestwood can become a consolidator in the midstream sector. While its MLP structure might not be for everyone, Crestwood's financial strength and upside potential make it look like an excellent option for income investors seeking a low-risk, high-yield dividend stock to buy.
This 8% yield is safe
Neha Chamaria (Enterprise Products Partners): Shares of Enterprise Products Partners have dropped nearly 9% since the last week of October, with the pipeline company's third-quarter numbers released earlier this month putting the stock under even more pressure after its earnings barely moved despite a surge in revenue. Now, here's what the market must understand: Midstream oil and gas companies are typically expected to earn stable income as they generate most of their income under long-term, fee-based contracts that don't fluctuate with moves in oil and gas prices. That's exactly what Enterprise Products Partners did: earn stable income in Q3.
Also, most investors invest in Enterprise Products Partners stock for its dividends. As high depreciation can depress earnings and not reflect the true picture of a midstream oil and gas company's performance, what matters is cash flows, or whether a company is generating enough cash flows to cover its dividends and invest in growth.
Enterprise Products Partners didn't leave much room to complain there: It generated record cash flow from operations worth $2.4 billion and distributable cash flow (DCF) worth $1.6 billion in Q3 that comfortably covered its distribution (or dividends) 1.6 times. The company also invested roughly $430 million on growth projects during the quarter.
That suggests Enterprise Products Partners' hefty dividend of 8% is pretty safe. With growth capital expenditures also expected to be lower next year, the company should not only be able to cover its distribution well but also raise its dividend yet again even if oil prices fall. In short, if you've been thinking about buying Enterprise Products Partners shares for its dividends, I don't see a reason why its Q3 numbers should deter you from diving straight in.
Just too much risk
Reuben Gregg Brewer (USA Compression Partners): I'm a dividend investor and high yields draw me in like light for a moth. That's why USA Compression Partners and its huge 13% distribution yield popped up on my radar screen. Yet a quick look proved to me that the fat yield just isn't worth the risk. And most investors should probably follow my lead.
For starters, USA Compression Partners is a master limited partnership, which is a complicated corporate structure requiring unitholders to deal with a K-1 form at tax time. It can get confusing and might even require you to hire a tax pro. MLPs also don't play well with tax-advantaged savings accounts and are frequently noted as problematic on Capitol Hill because of the tax benefits they offer. If you try to keep things simple, as I do, then MLPs aren't your best bet.
On top of that, USA Compression Partners offers services to the highly cyclical energy industry. Essentially, it provides the machinery that keeps pressure high on pipelines and in drilling environments. It's not an inherently bad business, but when times are tough the distribution can start to look a bit questionable. For example, in pandemic-hit 2020, distributable cash flow didn't fully cover the distribution. Coverage was just a touch over 100% in the second quarter, thanks to the energy industry rebound, but it would be tough to call the distribution "safe."
Meanwhile, from a big picture perspective, energy services companies tend to be even more cyclical than the drillers they serve and that's just too much risk for me to step into a barely covered, though huge, yield. I'm much happier with a lower yield from a more stable business.
