Dividends are powerful wealth creators. Since 1930, dividend payments have contributed 41% of the S&P 500's total return. Meanwhile, dividend-paying companies have historically produced market-beating returns, with the highest returns from companies that steadily increase their payouts.
The wealth-creating ability of dividends makes it easy to see why many investors love dividend stocks. Enterprise Products Partners (EPD 0.45%), Clearway Energy (CWEN 0.26%), and American States Water (AWR -0.57%) stand out to a few Fool.com contributors as great options for those who adore dividends. Here's why they believe these dividend stocks can sustain and grow their payouts no matter what's going on in the broader market.
A cog in the machine
Reuben Gregg Brewer (Enterprise Products Partners): Oil and natural gas prices are inherently volatile, but the underlying demand is resilient throughout the energy cycle. In fact, energy demand tends to be robust regardless of what is happening in the market or even the economy. That's because energy is what drives modern life. Even in recessions, when demand does actually fall, it declines just so much because the world can't function without energy. Enterprise Products Partners is tapped into that demand.
Unlike energy producers, Enterprise simply helps other companies move oil and natural gas around the world via its collection of pipelines, storage, processing, and transportation assets. It really is a vital partner to energy companies, noting, for example, that it accounts for 16% of all liquified petroleum gas exports globally and roughly a third of the tally from the United States.
But the key to the story is that Enterprise charges fees for using its assets. Thus, commodity prices aren't all that important to its financial performance. So long as demand remains solid, so will the energy giant's results.
The reliable cash flows it generates are what back the hefty 7.5% distribution yield this master limited partnership (MLP) offers. That distribution is covered by distributable cash flow by a hefty 1.9 times. The distribution has been increased annually for 24 years. And Enterprise has an investment-grade credit rating. It is built from the ground up to pay investors a reliable distribution no matter what is happening around it.
A fully powered dividend growth plan
Matt DiLallo (Clearway Energy): Clearway Energy offers dividend investors the best of both worlds. It pays a high-yielding dividend (currently 5.3%) that it should be able to grow at a high rate for the next several years, no matter what's going on in the broader market.
Clearway is one of the country's largest renewable power producers. It also owns some environmentally sound natural gas power plants. The company sells the electricity generated by these facilities to utilities and corporate buyers under long-term, fixed-rate power purchase agreements (PPAs). These PPAs supply it with predictable cash flow to support its high-yielding dividend.
The clean power company expects to grow its payout in the upper end of its 5% to 8% annual target range through 2026. Powering that view is last year's sale of its thermal business. It cashed in on strong demand for those assets, netting $1.35 billion in net proceeds, giving it the cash to invest in higher-returning renewable energy opportunities.
Clearway has already lined up deals to put all that capital to work. It has funded and closed over $700 million of investments. It should close the remaining transactions by the end of next year. These investments give Clearway Energy the line of sight to grow its cash flow and dividend for the next several years.
Meanwhile, Clearway should have ample financial flexibility to continue expanding its portfolio and dividend after 2026. The company retains some post-dividend free cash, giving it funds to make new investments, and has some balance sheet capacity. In addition, Clearway has several strategic industry relationships that can provide it with new investment opportunities.
With a fully powered dividend growth plan, Clearway Energy is a stock that income investors can count on in the coming years.
An underrated dividend growth stock
Neha Chamaria (American States Water): American States Water is perhaps one of the most boring – and least talked about -- stocks you could own. After all, it's just a water company providing water and wastewater services to some hundreds of thousands of customers.
Yet, what you may not know is that American States Water is also an incredible dividend stock. In fact, it is a Dividend King -- with the longest streak of annual dividend increases among all the publicly listed companies in the U.S.! To put a number to that, American States stock has increased its dividend every year for the past 68 consecutive years now.
Needless to say, this is a no-brainer dividend stock that can pay you in both good and bad times. Also, this company stands out for one big reason: Aside from operating in a highly regulated industry that ensures stable cash flows, American States serves multiple military bases under 50-year contracts. It's an unregulated but growing business that contributes to the company's cash flows and, therefore, dividends.
Now, one may argue that a stock yielding 1.9% is far from appealing, but do not underestimate the power of American States' dividend growth. In just the past decade, you could have almost quadrupled your investment in the stock had you reinvested the dividends all along. Go back another decade, and the kind of returns this dividend stock has generated for long-term investors is jaw-dropping. In short, American States Water is the kind of stock that can make you money even in bear markets.
