The energy industry is offering some enticing dividends these days. The sector has the highest dividend yield in the S&P 500 at around 4%, roughly double the index's average. Meanwhile, some energy companies offer even higher dividend yields.
Many of the best payouts are currently coming from pipeline stocks. Several offer ultra-high-yielding dividends that they should have no problem continuing to grow. Three top ones that investors will probably eventually regret not buying at their current prices are Enbridge (ENB 0.06%), Enterprise Products Partners (EPD 0.66%), and Energy Transfer (ET 0.62%).
Visible growth ahead
Enbridge's dividend currently clocks in at a 6.4% yield. That high yield is largely the result of its cheap valuation. The Canadian energy infrastructure giant expects to produce 5.35 Canadian dollars per share ($3.99) of distributable cash flow this year at the mid-point of its guidance range. With its stock price recently around $40 a share, it trades at about 10 times cash flow. That's a pretty cheap price for a company that produces stable and growing cash flow.
Enbridge expects to grow its cash flow per share by a 5% to 7% annual rate through at least 2024. Fueling that forecast is the company's multi-billion-dollar backlog of expansion projects, including natural gas pipeline expansions, natural gas utility growth projects, and several offshore wind farms in Europe. Enbridge has ample capacity to fund those projects. It has investment-grade credit with leverage at the low end of its target range. The company also has a conservative dividend payout ratio of 65%, enabling it to retain substantial cash flow to help finance its continued expansion.
That conservative financial profile puts Enbridge's dividend on a firm foundation. Meanwhile, its visible growth should give it the fuel to continue increasing its payout, which it has done for the last 27 straight years. The market should eventually reward this steady growth with a higher valuation.
The fuel to continue growing its cash flow
Enterprise Products Partners offers an even higher yield at 7.6%. That big-time yield is also the result of the company's cheap valuation. Over the past year, the master limited partnership (MLP) has generated $7.8 billion of cash flow from operations. With a current market cap of around $54.3 billion, it trades at only seven times its cash flow.
Enterprise Products Partners should be able to continue growing its cash flow in the future. It currently has $5.5 billion of expansion projects under construction that should enter service through 2025. Meanwhile, it has ample financial flexibility to cover those expansions. Enterprise has investment-grade credit with leverage below the low end of its target range. It also has a low payout ratio of 54% of its adjusted cash flow from operations.
With visible growth ahead and a strong financial profile, Enterprise Products Partners should have no problem continuing to grow its big-time payout. The pipeline company has increased its cash distribution to investors for 24 straight years.
Getting back up to its peak
Energy Transfer's distribution currently yields 8.7%. That monster yield is also the result of a cheap valuation. The MLP trades at the lowest valuation in its peer group.
That bottom-of-the-barrel valuation comes even though Energy Transfer has significantly improved in recent years. It reduced its distribution in 2020, enabling it to generate excess cash to pay off debt. That has Energy Transfer on track to achieve its targeted leverage ratio this year.
With its balance sheet back on solid ground, Energy Transfer has been able to start returning more cash to investors by steadily boosting its distribution. The MLP has already increased its payout by 70% this year. That has the company closer to achieving its goal of returning the distribution to its former peak.
Energy Transfer could eventually eclipse that mark. The company is investing up to $2.1 billion in expansion projects that should come online by the end of next year. Meanwhile, it has several more under development to fuel future growth. With a solid balance sheet and a business producing free cash after covering its rapidly rising distribution and capital expenses, it will have more room to grow its payout as it completes additional growth projects.
The market can't ignore their growth forever
Enbridge, Enterprise Products Partners, and Energy Transfer all trade at low valuations despite their solid financial profiles and growth prospects, meaning investors can lock in ultra-high-yielding payouts these days. Those bottom-of-the-barrel valuations might last only a short time. The market should eventually reward their continued growth with higher valuations. This upside potential is why investors might eventually regret not taking advantage of the current pricing.