If you are a dividend investor looking to create a reliable stream of passive income, you have to consider far more than just a company's dividend yield. You have to examine the business that backs that dividend to make sure it can survive for decades into the future. Two high-yield stocks that look like they can do just that, and pay you well for sticking around, are Enbridge (ENB -1.21%) and Black Hills Corporation (BKH -0.63%). Here's what you need to know.
Enbridge is positioned to reliably grow its dividend
Enbridge is one of the largest midstream companies in North America. It owns a massive portfolio of energy infrastructure, which would be virtually impossible to replace or displace. It largely charges fees for the use of its assets, generating reliable cash flows even when energy prices are weak. It also owns a natural gas utility business and renewable power assets, including offshore wind farms in Europe. This diversification is purposeful, as the company is working to adjust its portfolio along with the shifts taking place in global energy markets.
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Enbridge has a 7.5% dividend yield. The dividend has been increased annually for the last 29 years. So it is a reliable dividend payer with a clear focus on returning value to shareholders. In addition, the company has an investment-grade-rated balance sheet, and the 65% distributable cash-flow payout ratio is comfortably in the middle of management's target range. There's a strong financial foundation behind the dividend, too.
As for growth, it is likely to be slow and steady over time. Indeed, the huge yield will likely make up the vast majority of an investor's return, which should be just fine if you are looking to maximize your income stream. And yet, Enbridge's management believes it will grow distributable cash flow by around 5% a year over the longer term. Dividend growth would likely track at about that pace, too.
Black Hills is an out-of-favor Dividend King
Black Hills Corporation is a regulated natural gas and electric utility. It serves 1.3 million customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. As a regulated utility, it is granted monopolies in the regions it serves but, in exchange, must agree to get its rates and investment plans approved by the government. Generally speaking, regulators attempt to balance reasonable returns for the company and its investors against low costs and reliable power for customers. In the end, that basically means slow and steady growth for Black Hills.
The biggest example of this is the company's status as a Dividend King, with over five decades of annual dividend increases behind it. The dividend yield is 4.8%, which is near the high end of the yield range over the past decade. In other words, the stock looks relatively cheap today. It has an investment-grade-rated balance sheet and a payout-ratio target of 55% to 65%. To be fair, the payout ratio is toward the high end of that range right now. But the long-term dividend history suggests that's not a reason to worry about the dividend.
As for growth, the areas Black Hills serves are growing nearly three times as fast as the overall U.S. population. And there is the ongoing global shift toward cleaner energy sources. Combined, these facts are likely to continue to lead to slow and steady growth as regulators work with the company to ensure there's enough reliable power to keep customers happy.
Strong businesses lead to strong dividends
You can easily find companies offering double-digit yields, but the real question is whether or not you can count on those yields for decades to come. That's not likely to be an issue for Enbridge or Black Hills, two reliable dividend payers with attractive dividends and strong businesses. If you are looking for passive income, these two stocks should be on your short list today.
