The dividend yield on the S&P 500 has steadily fallen over the years. It's currently around a two-decade low of about 1.3%. That's due to an elevated valuation for the index compared to its historical average and a preference for share repurchases over dividends by a growing number of companies over the years. It's therefore getting harder for income investors to find attractive yields.
However, one spot where they can find some big-time dividends these days is the energy sector. Three energy stocks offering yields more than triple the broader market are Enbridge (ENB -0.15%), Enterprise Products Partners (EPD -0.66%), and TC Energy (TRP -1.04%). With plenty of fuel to continue growing those big-time payouts in the future, these energy stocks look like great buys for this year and beyond.
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This high-octane dividend should continue growing
Enbridge's dividend yield is currently around 6%. While a yield that high might seem risky, that's not the case with Enbridge's payout. The Canadian energy infrastructure company has one of the lowest risk business models in the sector. It generates very stable and predictable cash flow. The company gets 98% of its revenue from cost-of-service agreements and long-term contracts with high-quality customers (95% have investment-grade credit ratings).
Meanwhile, Enbridge has a strong financial profile. It has an investment-grade credit rating with leverage metrics toward the low-end of its target range. It also has a reasonable dividend payout ratio. That provides the company with the financial capacity to invest billions of dollars annually in expanding its operations.
The company currently has a multi-billion project backlog, giving it the fuel to grow its cash flow per share by a 5% to 7% annual rate through at least 2024. Meanwhile, it has an extensive pipeline of future projects. The company is increasingly investing in infrastructure to support cleaner energy, including natural gas pipelines, renewable energy projects, hydrogen, and carbon capture and storage. These investments should give Enbridge the fuel to continue growing its dividend, something it has done for the last 27 years.
Dual fuels should push the dividend higher
Enterprise Products Partners currently offers a 7.6%-yielding distribution. The master limited partnership (MLP) has done an excellent job growing that payout. It notched its 23rd consecutive annual increase earlier this year.
That payout is on one of the firmest foundations in the energy sector. The MLP generates very stable cash flow backed primarily by long-term contracts. Meanwhile, it pays out a conservative amount of its cash flow via the distribution. It also has one of the highest credit ratings in the midstream space, backed by a leverage ratio below its target area.
Enterprise Products Partners thus has ample financial flexibility to continue expanding its operations. It recently used some of its capacity to acquire Navitas Midstream in a $3.25 billion deal. Meanwhile, it expects to invest $1.5 billion on expansion projects this year. These and future investments should enable Enterprise to continue growing its cash flow. That should give the MLP the fuel to keep boosting its payout to investors.
Clean energy-powered dividend growth
TC Energy's dividend currently yields more than 5%. The Canadian energy infrastructure company also has a long history of growing its payout. This year marked its 22nd straight year of dividend growth.
That upward trend should continue in the coming years. TC Energy has an enormous pipeline of expansion opportunities, mainly focused on clean energy infrastructure like natural gas pipelines and the life extension of its nuclear power plant. These investments should provide the fuel to grow its earnings by at least a 5% compound annual rate through 2026.
This earnings growth should enable TC Energy to continue increasing its payout. Further enhancing that view is the company's stable cash flow -- 95% comes from regulated and long-term contracted assets -- conservative dividend payout ratio, and strong balance sheet. Those factors give the company the financial flexibility to invest billions of dollars to grow its operations while also continuing to increase its dividend.
Fully fueled income streams
Enbridge, Enterprise Products Partners, and TC Energy have increased their high-yield dividends for more than 20 years. That should continue in the future because all three have plenty of investment opportunities to continue growing their operations, cash flow, and dividends. They're great stocks for investors who want to collect a big-time income stream in 2022 and beyond.
