I've learned the hard way that higher-yielding dividend stocks can be higher risk. These companies typically pay out a large percentage of their cash to investors via dividends. That leaves less room for error if market conditions deteriorate, potentially forcing them to reduce their lucrative payouts.
However, not all high-dividend stocks have high-risk profiles. I would buy Enterprise Products Partners (EPD +0.75%) and Verizon (VZ 0.05%) without hesitation. Here's why their big-time dividends are relatively low risk.
NYSE: EPD
Key Data Points
The fuel to continue growing its big-time payout
Enterprise Products Partners currently offers a 7.5% yield. That's many multiples above the 1.6% dividend yield of the S&P 500.
That big-time payout is on a very sustainable foundation. A big driver is Enterprise Products' lower-risk business model. The energy midstream master limited partnership (MLP) operates a diversified portfolio of pipelines, processing plants, storage terminals, petrochemical complexes, and export facilities. They generate predictable cash flow backed by long-term contracts and government-regulated rate structures.
The MLP pays out a conservative portion of its cash flow -- 56% in the second quarter -- to support its distribution. That gives it a huge cushion. It also enables the company to retain cash to fund expansion projects and maintain a strong balance sheet. Enterprise Products has a strong investment-grade credit rating backed by a 3.1 leverage ratio, which is below its 3.25-to-3.5 target range. That gives it the additional financial flexibility to invest in expansion projects and acquisitions.
Enterprise's growth-related investments have enabled it to steadily increase its distribution to investors. The company delivered its 24th straight year of increasing its payout in 2022.
It should have plenty of fuel to continue growing its distribution in the future. The MLP currently has $5.5 billion of expansion projects under construction that should enter service through 2025. That should supply it with steadily growing cash flow to boost its payout.
NYSE: VZ
Key Data Points
Cashing in on mobile communications
Verizon also offers a big-time dividend that currently yields 6.9%. The telecom giant's high-yielding dividend is on a solid foundation.
A big driver of that belief is its copious cash flows. Verizon has generated $28.2 billion of cash flow from operations through the first nine months of 2022. While that's down from $31.2 billion last year, it still provided the company with plenty of money to fund its expansion and dividend. Verizon spent $15.8 billion to maintain and expand its network while paying $8.1 billion in dividends.
That enabled it to produce $4.3 billion of excess cash to strengthen its already healthy balance sheet. It ended the quarter with a leverage ratio of 2.7 to back its strong investment-grade credit rating. That gives Verizon a lot of financial flexibility to weather an economic downturn while continuing to pay its dividend and invest in its business.
Verizon's investments to build out its 5G network should pay dividends in the future by enabling it to grow its average revenue per user and free cash flow. In addition, the company has taken steps this year to boost cash flow by increasing prices and instituting a cost-savings program. These initiatives should enable Verizon to continue growing its dividend. The company delivered its 16th consecutive annual dividend increase in 2022, the longest current streak in the U.S. telecom sector.
High conviction high-yield stocks
Enterprise Products Partners and Verizon pay big-time dividends that they should have no problem sustaining in the future. These companies generate more cash flow than they need to cover their payouts and capital expenses, enabling them to maintain strong balance sheets. With their growth-related investments expanding their cash flow, they should have the funds to continue growing their dividends. I wouldn't hesitate to add to my position in these big-time dividend stocks.
