With oil prices crashing the energy sector is full of great high-yield buying opportunities. Find out three reasons why Kinder Morgan (KMI -0.64%), Enterprise Products Partners (EPD -0.07%), and Magellan Midstream Partners (MMP 1.32%) are three of the best dividend energy stocks you can buy today.
Three things income investors need to consider
When it comes to picking the best dividend stocks there are three things all income investors should focus on: yield, payout sustainability, and future dividend growth prospects. These factors are why I think these three companies are your best bet at beating the market in the long term while generating steady, safe, and growing income.
As this table shows Kinder, Enterprise, and Magellan share all of these characteristics, with generous, safe, and fast-growing yields.
|Company/MLP||Yield||Payout Coverage Ratio||Projected 5 Year Payout Growth Rate|
|Enterprise Products Partners||4.6%||1.54||6.13%|
|Magellan Midstream Partners||3.5%||1.20||12.69%|
Toll road operators
A high dividend or distribution isn't much good if it's not sustainable -- especially when energy prices collapse. Luckily, these companies' payouts are well secured by their business models that focus on long-term, fixed-fee contracts that insulate the payout against the effects of plunging crude prices.
For example 94% of Kinder Morgan's 2015 projected earnings before depreciation and amortization is either fee based or hedged. In addition, Kinder's average remaining contract life on its natural gas pipelines doesn't expire for between 5.4 and 17 years, ensuring highly predictable cash flow that allows safe and sustainable dividend growth. These contracts also allow Kinder Morgan to project that it will generate an excess of $654 million in distributable cash flow in 2015, further protecting its dividend in the short term.
Meanwhile, 85% of Magellan's operating margins are fee based with only limited vulnerability to commodity prices, and even those profits are protected by hedging.
Enterprise as well generates the majority of its cash flows from long-term, fixed-fee contracts and, most important, these kinds of predictable cash flow projects make up the majority of the MLP's $10.5 billion in growth projects its building between 2014 and 2016.
Which brings me to another important point: all three pipeline operators have strong growth catalysts in the years and decades ahead.
Strong payout growth prospects
Despite the recent oil crash the demand for oil is likely to grow enormously in the decades to come. The same holds true for natural gas and natural gas liquids, which are expected to find strong demand growth from America's switch from coal to natural gas fired power plants, and the booming petrochemical industry, respectively.
In fact, a study conducted on the behalf of the Interstate Natural Gas Association of America Foundation projects that between 2014 and 2035 $640 billion, or $30 billion annually, will need to be invested to keep up with America's booming demand for shale oil, gas, and natural gas liquids.
Kinder Morgan has identified $18 billion in organic growth projects, with most projects not starting construction until contracts are secured from customers.
Meanwhile, Magellan Midstream has $750 million in growth projects its pursing over the next two years -- which doesn't even include its Saddlehorn Pipeline, the MLP's largest investment to date -- with an additional $500 million in potential projects under review.
Business models that can survive cheap oil
Finally, I'd like to point out that all three of these midstream -- transportation, processing, and storage -- operators are well diversified into businesses that can actually benefit from falling oil prices. For example, Magellan Midstream and Enterprise Products Partners have 26 million and 225 million barrels of oil and petroleum products storage capacity, respectively.
When oil prices crash so suddenly, something called a "contango trade" can occur, in which oil spot prices decline below that of oil prices ensured by futures contracts. Basically, this means that investors and oil producers are guaranteed a higher oil price in the future, allowing them to store the oil they produce to sell at a profit later. Thus, oil storage has been soaring in recent months and is up 25% since a year ago.
Storage demand has been rising so quickly in fact, that America may reach full crude storage capacity by the end of April. Soaring demand and a quickly evaporating supply means that the prices these midstream operators can charge for leasing oil storage capacity is likely to soar -- further insulating their payouts from the negative effects of the oil crash.
Income for decades
With generous yields, safe payouts, strong growth prospects, and business models that are resilient to low oil prices, Kinder Morgan, Enterprise Products Partners, and Magellan Midstream Partners offer long-term income investors excellent opportunities to build wealth and income in the years and decades ahead. I'd recommend you consider all three for a spot in your diversified income portfolio.