While there are a number of moneymaking investing strategies, buying dividend stocks just might be the best.
Back in 2013, J.P. Morgan Asset Management, a division of money-center bank JPMorgan Chase, issued a report comparing the performance of companies that initiated and grew their payouts to publicly traded companies that didn't pay a dividend. Over a 40-year stretch (1972-2012), the dividend stocks mopped the floor with the non-dividend payers: 9.5% annualized return vs. 1.6% annualized return.
Because income stocks are often profitable and time-tested, they're just the types of businesses we'd expect to increase in value over time. In other words, it's not a matter of if dividend stocks can make you money -- it's determining which dividend stocks to buy.
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If steady annual dividend income that can put inflation in its place is what you're after, ultra-high-yield energy stocks could be your answer. The following three passive income juggernauts average a 7.45% yield, which means you can generate $7,500 in annual income by investing roughly $101,000 (split equally).
Enterprise Products Partners: 6.9% yield
The first energy powerhouse that can help investors rake in the cash while taming historically high inflation is oil and gas stock Enterprise Products Partners (EPD -0.65%). Though its 6.9% yield is the low-water mark on this list, the company has raised its base annual payout in each of the past 23 years.
For some investors, the idea of putting their money to work in oil stocks may not be appealing. Just 25 months ago, the energy sector was in a state of shock as the COVID-19 pandemic led to global lockdowns and a cratering in crude oil demand. In fact, West Texas Intermediate futures briefly hit negative $40 a barrel.
But EPD (I'm referring to Enterprise Products Partners' ticker symbol here as an abbreviation for the company) is an entirely different beast. Whereas drillers and explorers were pummeled by the historic demand drawdown, EPD was fine. That's because it's an integrated midstream company. In plainer terms, it's an energy middleman. It controls more than 50,000 miles of transmission pipeline, has 14 billion cubic feet of natural gas storage capacity, operates 23 natural gas processing facilities, and manages 19 deepwater docks handling natural gas liquids.
The beauty of the midstream operating model is very simple: it's predictable. Utilizing volume-based commitments from drillers, EPD is able to forecast its annual cash flow with incredible accuracy. This is important, as it allows the company to outlay capital for new infrastructure, as well as make acquisitions. EPD currently has 10 major infrastructure projects under construction totaling $4.6 billion. All but two of these projects will be fully operational within the next 20 months.
If you need even more convincing, consider this: At no point during the pandemic did Enterprise Products Partners' distribution coverage ratio fall below 1.6. The "distribution coverage ratio" describes the amount of distributable cash flow from operations relative to what was paid to shareholders. A figure below 1 would imply an unsustainable payout. With EPD nowhere near this danger zone and oil and gas prices now soaring, it's safe to say this supercharged payout is rock-solid.
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Alliance Resource Partners: 7.14% yield
A second ultra-high-yield energy stock that can help income seekers generate $7,500 in annual payouts is coal producer Alliance Resource Partners (ARLP 0.53%). Following its recent 40% quarterly dividend hike, Alliance Resource Partners is parsing out a 7.1% yield.
As recently as the fourth quarter of 2020, coal stocks were a dumpster fire -- and that's putting it nicely. Between July 2018 and August 2020, coal price per ton plummeted almost 60%. Weakened demand from COVID-19, coupled with supply chain challenges and labor shortages, proved to be a perfect storm for much of the industry. At one point, even Alliance Resource Partners was forced to shelve its dividend due to economic uncertainty.
But that's all a distant memory. Historically high commodity inflation has sent the per-ton coal price up 600% since August 2020 (and that's after a modest pullback). With management expecting high inflation and robust coal prices to persist throughout 2022, the company aims to increase its distribution by 10% to 15% per quarter for the remainder of the year. If its share price were to stay the same, income investors would be looking at a yield of around 10%, or possibly higher.
What makes Alliance Resource Partners tick is its forward-thinking management team. Well over 90% of 2022's estimated coal production is already spoken for via volume and price commitments. Further, around 55% of next year's output, if similar to 2022, is locked in. During the first quarter, the company booked commitments all the way out to 2025. Similar to EPD, this is a way for Alliance Resource Partners to maintain a transparent outlook for its operating cash flow.
In addition to its coal operations, the company also has oil and gas royalty interests. Without getting too deep into the weeds, the higher oil and natural gas prices head, the likelier it is that Alliance Resource Partners will recognize more adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from this royalty segment. During the first quarter, the company's adjusted EBITDA from its oil and gas segment rose 139% from the prior-year period.
After years of underperformance, things couldn't be any better for Alliance Resource Partners.
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Antero Midstream: 8.31% yield
The third ultra-high-yield energy stock that can bring in the green and crush inflation is midstream natural gas operator Antero Midstream (AM -0.48%). Among the three stocks listed here, Antero's 8.31% yield is the highest.
Similar to EPD, Antero Midstream benefits from the predictability of the contracts it signs with parent company Antero Resources (AR -0.12%). The former provides gathering, compressing, processing, and water delivery for the latter. Knowing well in advance how much operating cash flow the company can expect in a given year allows Antero Midstream to outlay capital for new infrastructure projects without compromising its profitability or distribution.
Interestingly, Antero Midstream slashed its quarterly distribution by 27% last year. I say "interestingly" because the price for natural gas had improved significantly from the previous year, and the company had no trouble covering its distribution. However, there's a very good reason for this reduction.
Parent company Antero Resources plans to increase its drilling on Antero Midstream's acreage. The latter purposefully reduced its dividend to shift additional capital to new infrastructure projects through the midpoint of the decade. In announcing the move, Antero Midstream estimated that it would generate $400 million in incremental free cash flow by 2025. The company is effectively trading a small amount of near-term distributions to generate significantly more operating cash flow over the long run.
One reason to make this move is that it'll likely help push Antero Midstream's share price higher. Even though I'm pounding the table on the yields for these passive income juggernauts, their valuations can easily expand over time. But the other impetus behind this move is to shore up the company's balance sheet. Antero Midstream has reduced its net debt by over $1.6 billion since the end of 2019 and will likely end 2022 with a leverage ratio below 1.
While you're not going to get the dividend hike potential with Antero Midstream that you have with EPD and Alliance Resource Partners, this company still packs a punch for income investors.
