If you are a dividend investor like me, you prize consistency in all market environments, bull or bear. A high yield backed by a dividend that gets cut is likely to lead to less income and a loss of capital. No thanks! This is why one of the first screens I use when looking for a stock is a company's history of increasing its dividend. Then, I look at the businesses behind the dividend. Enbridge (ENB 0.39%) and NextEra Energy (NEE 2.17%) both come out looking like stocks that dividend investors would want to own for the long run.
Enbridge is a slow and steady tortoise
Canadian Enbridge is lumped together with the midstream energy sector. That's an appropriate place for it, given that around 57% of the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from oil pipelines and another 28% from natural gas pipelines. It is, in fact, one of the largest midstream companies in North America, with a portfolio of energy infrastructure that would be difficult, if not impossible, to replace or replicate.
The pipelines and other midstream assets it owns are largely fee-driven, which results in fairly consistent cash flow regardless of what is going on with energy prices. But do the quick math -- this side of the company makes up 85% of EBITDA. The rest comes from a regulated natural gas utility (12% of EBITDA) and renewable power assets (the remainder). Regulated utilities are super boring and reliable cash flow generators, and the renewable power assets Enbridge owns are under long-term contracts.
There's plenty of cash flow coming in to cover the historically high 7.5% dividend yield, noting that the distributable cash flow payout ratio is comfortably in the middle of the company's target 60% to 70% range. The dividend, meanwhile, has been increased annually for 29 consecutive years. There's no indication that the dividend streak is anywhere near ending.
That said, Enbridge is about to get even more boring and reliable with the planned purchase of three additional regulated natural gas utilities in 2024. That will shift the business mix to 50% oil pipes, 25% gas pipes, 22% gas utilities, and 3% clean energy. Being a conservative and steady dividend payer is clearly a high priority for management. While the high yield is likely to make up the lion's share of your total return here, that should be a net positive for investors seeking to maximize the income they generate from their portfolios.
NEE Dividend Yield data by YCharts
NextEra is a great option for dividend growth investors
Not everyone is looking for stocks that have high yields; some prefer to own companies that reward income investors with rapid dividend growth. That is exactly what you'll get with NextEra Energy, one of the largest utilities in the United States. A high-dividend-growth utility may sound too good to be true, but NextEra Energy's dividend has been increased at a 10% annualized clip over the past decade. That's pretty good for any company, but extra impressive for a utility. In fact, half that dividend growth rate would be strong for a utility!
Better yet, NextEra Energy's management team is projecting dividend growth to be around 10% per year all the way out to 2026. So there are more sizable dividend hikes to come, backed by earnings growth of between 6% and 8% a year. For reference, the dividend has been increased each year for 29 consecutive years, and the dividend yield is a historically high 3.3% or so right now. While a 3.3% yield won't excite income-focused investors, combined with the robust dividend growth rate, NextEra Energy should be quite alluring to dividend growth and growth and income investors.
The key to the growth story here is that NextEra Energy actually mixes a slow and steady regulated utility operation with a fast growing renewable power business. Since the clean energy transition that's taking shape will be a decades-long affair, there's no reason to believe that NextEra Energy's growth runway will come to a sudden halt anytime soon.
You pick: High yield or high growth
Enbridge and NextEra Energy will probably appeal to different types of investors. But they share some very important traits. Both have impressive dividend histories, strong and reliable businesses, and historically high yields. They are the types of dividend stocks that you buy and hold for the long run, particularly if you acquire them while they appear to be on sale.
