High-yield dividend stocks can be a dream or a nightmare, depending on whether you find the companies with solid fundamentals -- or those operating like a house of cards, eventually falling and cutting their payout. Part of finding great dividend stocks is knowing which industries to consider. For example, there's the energy sector: It's essential to everyday life, whether refueling your car or heating your home.
Like most industries, there are market leaders with track records of rewarding shareholders and the fundamentals to give investors confidence. If 6% and 8% dividend yields sound appetizing, consider these two high-yield stocks that you can hold and sleep well at night.
Partner with this midstream stock
NYSE: EPD
Key Data Points
Enterprise Products Partners (EPD 0.40%) is a midstream company. As such, it owns and operates more than 50,000 miles of pipelines and other facilities that transport natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals throughout North America. A midstream company's primary purpose is to transfer these materials from exploration sites to where they are refined, used, or sold.
The company is a master limited partnership (MLP), a specific structure for businesses in certain industries, primarily energy. MLPs are pass-through entities: They don't pay corporate taxes, instead passing their profits or losses on to the limited partners (the investors holding ownership units).
MLPs pay a percentage of their distributable cash flow to unitholders, which are like dividends but have different tax rules. You should contact a tax professional for the implications of owning MLPs. The high dividend yields and potential tax advantages typical of MLPs can appeal to income investors.
Enterprise Products Partners has proved to be a steady grower over the years; it has increased its dividend for 24 consecutive years, averaging about 7% annual growth. Not bad for a payout that offers investors an 8.1% yield today!
More importantly, the payout is safe; cash profits covered distributions by 1.8 times in 2022, and the balance sheet is healthy. The company is leveraged to 3.1 times net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA). And it has an investment-grade BBB+ credit rating.
Cash left over from the dividend helps fund new growth projects; there are $5.5 billion in major projects under construction that will come on line between now and 2025. Overall, Enterprise Products Partners is a well-managed business with solid financials in a stable industry. The dividend yield is currently near the high end of its 10-year range, so investors considering the stock can lock in an excellent yield today.
Head north for a 6% yield
NYSE: ENB
Key Data Points
Enbridge (ENB 0.72%) plays an enormous part in moving energy resources through North America. The company is based in Calgary, Canada.
Its pipelines and facilities connect the Alberta oil sands, one of the world's largest oil reserves, to the export and refinery hubs of Texas and the Gulf of Mexico. Enbridge's natural gas pipelines alone span more than 75,000 miles. The company also has its hand in renewable energy, with assets producing 2.2 gigawatts that power 900,000 homes.
Unlike Enterprise Products Partners, Enbridge is a traditional C-corp, so it pays dividends. It's an outstanding payer: You can get a 6.8% yield at the current share price. And it has paid and raised its dividend for 26 consecutive years. The dividend payout ratio is 66% of cash flow, so some breathing room is built in.
You should always check the balance sheet of a dividend stock, especially high-yielders, to ensure the payout is sustainable. Enbridge has a higher leverage ratio than Enterprise Products Partners at 4.7 times debt to EBITDA, but has the same BBB+ credit rating. Enbridge's leverage ratio is at the low end of its 10-year range, so investors should feel good about the dividend's safety given this fact and the manageable payout ratio.
Today, oil pipelines are Enbridge's most significant contributor to its EBITDA, but rising demand for liquid natural gas (LNG) could drive long-term growth. For example, an industry expert from Morgan Stanley believes that global LNG demand could grow by 25% to 50% by 2030. This would make it one of the fastest-growing hydrocarbons, and Enbridge could play a role in that.
Geopolitical tensions with Russia could mean more demand for North American hydrocarbons. Assuming Enbridge continues investing in growing its capacity, the company could benefit from this rising tide over the long term. The stock has been roughly flat over the past year. Despite that, Enbridge's dividend remains an attractive option for yield-thirsty investors.
