3 Ultra-High-Yield Dividend Stocks That Gave Their Investors a Raise Last Year

Some investments are great for those desiring to collect passive income because they pay high yields. In many cases, that fixed payout makes up the entire return. However, some companies offer the best of both worlds: They pay an attractive dividend that they can grow. 

Three dividend stocks that stand out to a few Fool.com contributors for their yields are Magellan Midstream Partners (MMP), Energy Transfer (ET 1.94%), and Enterprise Products Partners (EPD 1.12%). Each company gave their investors a raise last year. That makes them even more attractive for those who want to earn passive income. 

Slow and steady

Reuben Gregg Brewer (Magellan Midstream Partners): The 21 years of annual distribution increases behind Magellan Midstream Partners isn't as long as some of its midstream peers. But the streak dates all the way back to the master limited partnership's (MLP) initial public offering in 2001. That's a record that any company can be proud of. Now add in a huge 7.6% yield, and investors looking to maximize their passive income stream with a reliable dividend investment should take notice.

Roughly 85% of Magellan's earnings before interest, taxes, depreciation, and amortization (EBITDA) is fee based. Magellan has an investment-grade-rated balance sheet. And while the 1.3 times distribution coverage projected for 2023 isn't as high as some peers, it is better than the MLP's target of 1.2 times. All in, those are fairly attractive points that suggest the distribution is safe and likely has room to keep growing.

The problem that some investors may see is that Magellan has two main lines of business: moving oil (about 30% of gross margin) and handling refined products like gasoline and diesel fuel (70%). That may bother those with an ESG mindset or investors who simply believe that carbon fuels are doomed.

The thing is, the death of the combustion engine has been greatly exaggerated, with Magellan estimating that electric vehicles only make up 1% or so of the vehicles in the regions it serves. In other words, despite the dire headlines, it looks like Magellan's carbon fuel-focused business still has a long runway ahead of it.

A monster raise, with more to come

Matt DiLallo (Energy Transfer): Midstream giant Energy Transfer increased its payout by a jaw-dropping 75% over the past year. As a result of that monster boost, the MLP's distribution currently yields more than 9.6%. 

There's a bit more to the story here. Energy Transfer had to slash its distribution in half during 2020 to retain additional cash flow to help shore up its balance sheet. The MLP pledged to bring the payout back up to its prior peak as it reduced leverage to its target range of 4.0 to 4.5 times debt-to-EBITDA. The company achieved that goal by the end of last year, enabling it to return the distribution to its former glory. 

However, Energy Transfer likely isn't done raising its distribution. The company now has a much stronger financial profile, giving it lots of flexibility. It's retaining more than enough cash after paying the distribution to cover its expansion-related spending. That leaves Energy Transfer with ample financial flexibility to make acquisitions. 

The company recently agreed to buy Lotus Midstream for $1.45 billion. Energy Transfer structured the deal so that it wouldn't impact its balance sheet. Meanwhile, the deal will boost the company's free cash flow. As a result, Energy Transfer will produce more cash to fund organic expansions and distributions while maintaining the financial flexibility to make additional acquisitions as opportunities arise. 

Energy Transfer's combination of organic and acquired growth should supply it with rising cash flows in the future. That could give the MLP the fuel to increase its already sizable payout. 

A rock-solid dividend growth stock

Neha Chamaria (Enterprise Products Partners): 2022 marked Enterprise Products Partners' 24th consecutive year of dividend increases. That also means Enterprise Products has raised its payout every year since going public in 1998, and there's every chance the oil and gas stock will continue to reward shareholders with bigger dividends every year.

That's because of three things: a solid foothold in the resilient midstream energy space, management's focus on financial stability, and a focus on long-term shareholder returns.

Enterprise Products increased its payout by 5.4% last year. That may not be a big raise, but the company has moderated its distribution growth over the past five years because it has reinvested a larger amount of cash into the business to fund growth and repay debt.

In 2022 alone, Enterprise Products reduced its debt by $1.3 billion. With the company's sales volumes and margins rising alongside, buoyed by its acquisition of Navitas Midstream, Enterprise Products grew its distributable cash flow (DCF) by 17% to $7.8 billion in 2022.

That DCF was enough to cover Enterprise Products' payout by 1.9 times. That's its highest-ever distribution coverage, which also means the company is flush with cash now and there's greater scope for it to announce bigger dividend increases this year and beyond. Already, the stock yields a solid 7.3% today.

Enterprise Products' dividend growth is testimony to its resilience and commitment to shareholders. Also, with more than 50,000 miles of pipeline that store, process, and transport everything from natural gas liquids and crude oil to refined products, Enterprise Products holds an important place in the oil and gas industry. Combined, the two factors suggest Enterprise Products' dividends should only grow bigger from here.