The dividend yield on the S&P500 has steadily declined over the years. It is currently hovering around a two-decade low of around 1.3%. This is due to a high valuation of the index relative to its historical average and a preference for share buybacks over dividends by an increasing number of companies over the years. This makes it increasingly difficult for income-oriented investors to find attractive returns.
However, one place where they can find significant dividends these days is in the energy sector. Three energy stocks offering yields more than triple the broader market are Enbridge (NYSE: ENB), Enterprise Product Partners (NYSE:EPD)and TC Energy (NYSE: TRP). With plenty of fuel to keep those big payouts growing in the future, these energy stocks look like great buys for this year and beyond.
This high octane dividend should continue to grow
Enbridge dividend yield is currently around 6%. Although such a high return may seem risky, this is not the case with the payment from Enbridge. The Canadian energy infrastructure company has one of the lowest risk business models in the industry. It generates very stable and predictable cash flows. The company derives 98% of its revenue from cost-of-service agreements and long-term contracts with high-quality customers (95% have high-quality credit ratings).
Meanwhile, Enbridge has a strong financial profile. It has an investment grade credit rating with leverage metrics down its target range. It also has a reasonable price dividend distribution rate. This gives the company the financial capacity to invest billions of dollars per year in expanding its operations.
The company currently has a multi-billion project backlog, giving it the fuel to grow its cash flow per share by 5-7% per year through at least 2024. In the meantime, it has an extensive portfolio of future projects. The company is increasingly investing in infrastructure to support cleaner energy, including gas pipelines, renewable energy projects, hydrogen, and carbon capture and storage. These investments should give Enbridge the fuel it needs to continue growing its dividend, which it has been doing for the past 27 years.
Dual fuels should drive up the dividend
Enterprise Products Partners currently offers a 7.6% yield distribution. The Master Limited Partnership (MLP) has done a great job increasing this payout. It recorded its 23rd consecutive annual increase earlier this year.
This payout rests on one of the strongest foundations in the energy industry. The MLP generates very stable cash flows supported mainly by long-term contracts. Meanwhile, it pays out a conservative amount of its cash flow via distribution. It also has one of the highest credit ratings in the middle space, backed by a leverage ratio below its target zone.
Enterprise Products Partners thus has great financial flexibility to pursue the expansion of its operations. It recently used some of its capacity to acquire Navitas Midstream in a $3.25 billion deal. Meanwhile, it plans to invest $1.5 billion in expansion projects this year. These investments and future investments should allow Enterprise to continue to increase its cash flow. This should give the MLP the fuel it needs to keep increasing its payouts to investors.
Dividend Growth Fueled by Clean Energy
TC Energy’s dividend is currently yielding over 5%. The Canadian energy infrastructure company also has a long history of increasing its payouts. This year marked its 22nd consecutive year of dividend growth.
This upward trend is expected to continue in the coming years. TC Energy has a huge pipeline of expansion opportunities, mostly focused on clean energy infrastructure like gas pipelines and extending the life of its nuclear plant. These investments should provide the fuel to grow its earnings by at least 5% at a compound annual rate through 2026.
This earnings growth should allow TC Energy to continue to increase its distribution. The company’s stable cash flow – 95% comes from long-lived regulated and contractual assets – a conservative dividend payout ratio and a strong balance sheet further reinforce this view. These factors give the company the financial flexibility to invest billions of dollars in growing its operations while continuing to increase its dividend.
Fully funded revenue streams
Enbridge, Enterprise Products Partners and TC Energy have been growing their high yield dividends for over 20 years. This should continue in the future as all three have plenty of investment opportunities to continue growing their operations, cash flow and dividends. These are excellent stocks for investors who want to collect a significant stream of income in 2022 and beyond.
10 stocks we like better than Enbridge
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They have just revealed what they believe to be the ten best stocks for investors to buy now…and Enbridge was not one of them! That’s right – they think these 10 stocks are even better buys.
* Equity Advisor Returns as of March 3, 2022
Matthew DiLallo owns Enbridge and Enterprise Products Partners. The Motley Fool owns and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.