High dividend stocks appeal to many investors living off dividends in retirement because their high yields provide generous income.
Many of the highest paying dividend stocks offer a high yield in excess of 4%, and some even yield 10% or more.
However, not all high yield dividend stocks are safe. Let’s review what high dividend stocks are, where stocks with high dividends can be found in the market, and how to identify which high dividends are risky.
At the end of the article, we will take a look at 26 of the best high dividend stocks, providing analysis on each company. Almost all of these high yield stocks offer a dividend yield greater than 4%, have increased their dividends for at least five consecutive years, and maintain healthy Dividend Safety Scores.
The market’s strength has reduced the number of safe dividend stocks with high yields, but there are still several dozen worth reviewing.
By the way, many of the people interested in high dividend stocks are retirees looking to generate safe income from dividend-paying stocks. If that sounds like you, you might like to try our online product, which lets you track your portfolio’s income, dividend safety, and more.
You can learn more about our suite of portfolio tools and research for retirees by clicking here.
What are High Dividend Stocks?
I generally classify any stock with a dividend yield in excess of 4% as being a “high dividend stock.”
Why 4%? Well, the chart below shows the U.S. stock market’s dividend yield since 1871.
You can see that the stock market’s dividend yield has remained well below 4% for most of the last 25 years.
In today’s era of record-low interest rates, a 4% dividend yield is relatively high. In fact, it is about twice as high as the market’s dividend yield today.
A 4% dividend yield is also a sensible cutoff to use for investors who are funding their retirements primarily with dividend stocks rather than the traditional 4% withdrawal rule.
Regardless, why do some dividend-paying stocks offer much higher yields than others?
As you might have guessed, there are many different possible answers.
In some cases, a high yield reflects a company’s mature status. Since the business has relatively few profitable growth investments it can pursue, it returns most of its cash flow to shareholders in the form of dividends.
Utilities and telecom companies would be good examples.
Other high dividend stocks have unique business structures that require them to distribute most of their cash flow to investors for tax purposes.
Some stocks with high dividends are able to offer generous payouts because they use financial leverage to magnify their profits.
And then there are high yield stocks that have landed on hard times. Unfavorable business conditions have reduced their cash flow to the point where investors no longer believe their dividends are sustainable.
In these instances, the high yield is a mirage.
Let’s take a closer look at where yield-hungry investors can hunt for high dividend stocks.
Where to Find High Yield Stocks
Many different types of high dividend stocks exist in the market, and each type possesses unique benefits and risks.
Here are some of the most popular places to find higher-yielding dividend stocks:
Real Estate Investment Trusts (REITs): REITs were created in the 1960s as a tax-efficient way to help America fund the growth of its real estate. Like MLPs, REITs are pass-through entities that pay no federal income tax as long as they pay out at least 90% of their taxable income as dividends.
There are over a dozen different types of REITs (e.g. apartments, offices, hotels, nursing homes, storage, etc.), and they make money by leasing out their properties to tenants. Their high payout ratios and generally stable rent cash flow make them a very popular group of higher dividend stocks.
Master Limited Partnerships (MLPs): MLPs were created by the government in the 1980s to encourage investment in certain capital-intensive industries. Most MLPs operate in the energy sector and own expensive, long-lived assets such as pipelines, terminals, and storage tanks. Many of these assets help move different types of energy and fuel from one location to another for oil & gas companies.
MLPs can pay high dividends because they do not pay any income taxes (you pay taxes on your share of the MLP’s income instead), pay out almost all of their cash flow in the form of cash distributions (the MLP equivalent of corporate dividends), and generate fairly predictable earnings in many cases.
Business Development Companies (BDCs): BDCs were created in 1980 and are regulated investment companies. They are basically closed-end investment funds that are structured similarly to a REIT, meaning they avoid paying corporate taxes if they distribute at least 90% of their taxable income in the form of dividends.
There are many different types of BDCs, but they ultimately exist to raise funds from investors and provide loans to middle market companies, which are smaller businesses with generally non-investment grade credit. Roughly 200,000 of these businesses exist, and large banks are less likely to lend them growth capital, which is why BDCs are needed.
Closed-end Funds (CEFs): closed-end funds are a rather complex type of mutual fund whose shares are traded on a stock exchange. Its assets are actively managed by the fund’s portfolio managers and may be invested in stocks, bonds, and other securities. The majority of CEFs use leverage to increase the amount of income they generate, and CEFs often trade at premiums or discounts to their net asset value, depending largely on investor sentiment.
YieldCos: a relatively new class of high dividend stocks, YieldCos are pass-through entitles that purchase and operate completed renewable power plants (e.g. wind, solar, hydroelectric power), selling the clean energy they generate to utility companies under long-term, fixed-fee power purchase agreements.
Utilities & Telecom Sectors: utility and telecom companies are generally mature businesses with low growth rates. As a result, many of them return the majority of their cash flow to shareholders in the form of dividends, resulting in attractive yields.
The Highest Dividend Stocks Can Be Risky
After reading through the different lists above, you might have noticed that most high dividend stocks are not your basic blue chip corporations like Coca-Cola (KO) and Johnson & Johnson (JNJ).
Instead, many of them have unique business structures and risks to consider.
Take REITs and MLPs, for example. Since these high yield stocks distribute almost all of their cash flow to investors to maintain their favorable tax treatments, they must constantly raise external capital (i.e. debt and equity) to grow.
Realty Income (O), one of the best monthly dividend stocks, has nearly tripled its shares outstanding since 2008, for example.
On the other hand, a business like Johnson & Johnson can use the free cash flow it generates to pay dividends while still retaining plenty of funds to reinvest in new projects, growing earnings and dividends along the way (without needing to issue equity or new debt).
Since REITs and MLPs need to issue debt and sell additional shares to raise the money they need to keep growing their capital-intensive businesses (buying real estate and constructing pipelines isn’t cheap), they face additional risks compared to basic corporations.
If access to capital markets becomes restricted or more expensive (e.g. rising interest rates; a slumping share price), such as what happened during the financial crisis, these types of high dividend stocks can suddenly be very vulnerable.
Kinder Morgan (KMI), the largest pipeline operator in the country, is perhaps the most notorious example in recent years.
The company slashed its dividend by 75% in late 2015 as outside financing became too costly, forcing the company to pick between investing for growth and maintaining its dividend.
Ferrellgas Partners (FGP), a major retail distributor of propane, is another example of the risks certain high dividend stocks can pose.
While the MLP had been in business for more than 75 years and paid uninterrupted dividends since 1994, it stunned investors by slashing its distribution by more than 80%.
Ferrellgas Partners took on too much debt to diversify its business in recent years, and mild winter temperatures drove down propane sales, causing a cash crunch.
Simply put, high payout ratios and high financial leverage elevate the risk profile of many high dividend stocks.
A seemingly stable company can become dangerous in a hurry if unexpected hiccups surface.
In addition to their dependence on healthy capital markets, certain high dividend stocks such as REITs and MLPs also face regulatory risks.
For example, if Congress decided to change the tax treatment for MLPs, those businesses might not be able to avoid double taxation.
BDCs and CEFs contain their own unique risks, too. By employing meaningful amounts of financial leverage to boost income, any mistakes made by these high dividend stocks will be magnified, potentially jeopardizing their payouts.
If something appears too good to be true, it often is (eventually). Not surprisingly, many of the highest paying dividend stocks can also be value traps.
GameStop (GME) is one example. The company has been in business since 1994 and operates thousands of retail stores that primarily sell new and used video game hardware and accessories.
GameStop is a basic corporation, not a REIT or MLP, but its stock still yields more than 6%. However, the company appears to be more of a value trap than a high yield bargain.
GameStop’s sales have struggled in recent years as customers have increasingly favored digital game downloads, and the company’s profitability is steadily deteriorating.
Management has taken on increasing amounts of debt in an effort to diversify the company into more attractive markets, but the clock is ticking on its turnaround.
If results aren’t delivered over the coming years, the dividend will likely be at risk, and the value of the overall company (and your stock) could be significantly diminished.
At the end of the day, high yield investors need to do their homework and make sure they understand the unique risks of each high dividend stock they are considering – especially the financial leverage element.
Maintaining a well-diversified dividend portfolio is an essential risk management practice. Before piling into REITs, for example, consider that the Real Estate sector only accounts for roughly 3% of the S&P 500’s total value.
There are some very good REITs out there, but most things are better in moderation. You just never know what could happen, especially as we potentially begin exiting this period of record-low interest rates.
Safe High Dividend Stocks: What to Look For
While the risks of owning certain high yield dividend stocks are hopefully clear, there are a number of steps investors can take to pick out the safest ones.
First, it goes without saying that you should never buy any investment that you don’t understand.
Warren Buffett refers to this concept as staying within one’s circle of competence.
Many high yield stocks are unfortunately just too complicated for me to own them in my dividend portfolio.
Once you have identified a stock that you understand fairly well, you need to evaluate its riskiness.
Some of the biggest risk factors to be aware of for a stock are: (1) the industry it operates in; (2) the amount of operating leverage in its business model; (3) the amount of financial leverage on the balance sheet; (4) the size of the company; and (5) the current valuation multiple.
Collecting the information needed to gauge how risky a high yield dividend stock is can be a time-consuming process.
That’s one reason why we created Dividend Safety Scores, which scrub through a company’s financial statements to evaluate the safety of its dividend payment.
Dividend Safety Scores can serve as a good starting to point in the research process to steer clear of high yield traps.
Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
Investors can learn more about how Dividend Safety Scores work and view their real-time track record here.
We used our Dividend Safety Scores to help identify over 25 high dividend stocks that are reviewed in detail below.
Top High Dividend Stocks Analyzed
In this list, we analyzed 26 of the highest paying dividend stocks in the market.
Almost all of these companies offer a high dividend yield close to 4% or higher, have increased their dividends for at least five consecutive years, and score average or better for Dividend Safety.
The list is sorted by dividend yield from low to high, and our analysis is updated monthly.
Here are 26 of the most interesting high dividend stocks as of 9/4/18:
26) ExxonMobil (XOM)
Sector: Energy Industry: Integrated Oil Dividend Yield: 4.1% Forward P/E Ratio: 17.6 (as of 9/4/18)
Dividend Safety Score: 77 Dividend Growth Streak: 35 years
ExxonMobil was founded in 1870 and is one of the world’s oldest oil companies. It’s also the world’s largest publicly traded integrated oil conglomerate, with nearly 30,000 oil & gas wells on six continents.
The company operates in three distinct business segments: upstream oil & gas production, downstream refining, and specialty chemicals.
ExxonMobil’s greatest strengths are its scale, diversification, and conservative management team. If Exxon were its own nation, its total liquids production would make it one of the top 10 largest oil producers in the world.
Such scale helps Exxon achieve lower costs, which is essential in a commodity market. The company’s integrated business model also provides some cash flow diversification, helping it ride out energy cycles with somewhat less volatility than most of its rivals.
Exxon’s management team has a long track record of excellent capital allocation, which has helped the company enjoy higher returns on capital than all of its major peers.
Exxon has paid an uninterrupted quarterly dividend since 1882 and has increased its payout for more than 30 consecutive years. While Exxon’s dividend grew nearly 9% annually over the past decade, payout growth has slowed in recent years thanks to the crash in oil prices.
The company is still able to implement low to mid-single-digit dividend increases for now, including a 6.5% boost announced in April 2018, and cash flow from operations and asset sales now exceeds the company’s dividend, providing some more breathing room. If energy prices remain depressed, Exxon will arguably be the last company still standing and paying dividends.
General Mills maintains a diversified sales mix of packaged meals, cereal, snacks, baking products, yogurt, and more. The company’s largest brands are Cheerios, Betty Crocker, Yoplait, Pillsbury, Nature Valley, Old El Paso, and Haagen-Dazs. Each of these brands generates over $1 billion in annual sales.
By product category, snacks accounted for 21% of sales last year, cereal 17%, convenient meals 17%, yogurt 15%, dough 11%, baking mixes 11%, super-premium ice cream 5%, and vegetables and other products contributed 3%.
General Mills primarily sells its products to large retailers such as Wal-Mart (20% of sales), and close to 75% of its sales are made in the U.S. The company has over 500 SKUs per store and has been expanding its product categories organically and via acquisition.
General Mills and its predecessors have been around for well over 100 years. Compared to newer companies, General Mills benefits from its scale, long-standing distribution relationships, entrenched brands, and decades’ worth of marketing spend.
As long as General Mills is able to continue adapting to changing consumer preferences by introducing relevant new products and pursuing appropriate marketing campaigns, the company will likely maintain its strong staying power over time.
General Mills and its predecessors have paid dividends without interruption or reduction for more than 115 years, an amazing accomplishment. While the packaged food industry faces a number of headwinds today, the company’s dividend remains on solid ground.
Thanks to its recession-resistant business, solid cash flow generation, and reasonable payout ratio near 65%, General Mills should have no trouble maintaining its streak of uninterrupted dividends.
Jeff Harmening, a company insider for more than two decades, took over as CEO in June 2017. His top priority is improving sales growth by addressing issues such as product innovation and pricing. If successful, his actions will further strengthen the long-term safety of the company’s dividend.
Harmening announced a bold move to acquire Blue Buffalo for $8 billion (a pricey 22x EBITDA multiple) on February 23, 2018. The company is the fastest-growing major pet food company making natural foods and treats for dogs and cats.
General Mills expects to maintain its existing dividend until its balance sheet is in better health following this acquisition. It will likely take several years to gauge the success of this bold capital allocation move, but hopefully it results in a stronger, faster-growing, and more diversified business.
The stock took another step down this spring as input cost inflation crimped profitability. However, this issue shouldn’t affect General Mills’ long-term earnings power.
Dividend Safety Score: 72 Dividend Growth Streak: 13 years
TELUS is a Canadian telecommunications company that was formed in 1990 by the government of Alberta. The company is the second largest telecom company in Canada and provides a wide range of services, including voice, entertainment, satellite, IPTV, and healthcare IT.
In total, TELUS provides services to 8.9 million wireless subscribers, 1.8 million internet subscribers, and 1.1 million TV customers. It also has 1.3 million residential network access lines.
Wireless services account for roughly 65% of total EBITDA, with wireline (residential network access lines, internet subscribers, TV subscribers) accounting for the remaining 35% (wireline voice, a declining market, is about 10% of total revenue). Both segments are moderately growing overall.
The Canadian telecommunication sector is an oligopoly dominated by three big players – TELUS, Rogers Communication, and Bell. These three companies have strong pricing power and use their scale (i.e. massive subscriber bases and costly network infrastructure) to prevent new entrants coming into the market.
The capital-intensive telecom industry also has barriers to entry in the form of a costly, scarce resource – telecom spectrum. Additionally, telecom services are largely recession-resistant and enjoy sticky recurring revenue, providing very reliable cash flow (and dividends) every year.
TELUS has increased its dividend consecutively every year since 2004, growing its dividend by 11.9% annually over the past 10 years. Annual dividend growth has averaged about 10% over the last five years as well.
The company has a target to increase dividends by 7% to 10% annually from 2017 to 2019 while maintaining a payout ratio between 65% and 75%, so solid dividend growth is expected to continue for shareholders.
Dividend Safety Score: 73 Dividend Growth Streak: 13 years
Verizon is the largest wireless services provider in the country and provides 4G LTE coverage to over 98% of the country’s population.
Verizon has more than 116 million wireless retail connections, 5.9 million Fios (fiber-optic network) internet subscribers, and 4.6 million Fios video subscribers. In 2017, Verizon was the most profitable company in the telecommunications industry worldwide.
Verizon’s business can be broadly classified into two categories – wireless operations (86% of EBITDA) and wireline operations (14%). The company is also expanding into fast-growing areas such as the Internet of Things and digital media, which account for less than 10% of sales.
Verizon’s moat is in the form of a large subscriber base and valuable telecom spectrum. The company’s leading investments in its network have helped it consistently score the highest in wireless reliability, speed, and network performance compared to its peers AT&T, Sprint, and T-Mobile.
While the industry is intensely competitive, Verizon’s advanced network technologies and leading network coverage help it maintain its huge subscriber base. Verizon’s revenue stream is also regular and reliable since it is engaged in providing a non-discretionary service.
There is also little room for new entrants because the telecom industry is very mature. Spectrum licenses are extremely expensive and infrequently available, and there are only so many wireless subscribers in the market to fund these costs. Moreover, huge spending is required to develop new technologies. Verizon has been at forefront of developing 5G wireless technology.
Verizon has also made acquisitions to strengthen its wireless offering (bought Vodafone’s remaining 45% stake in Verizon Wireless in 2014) and branch into mobile advertising solutions (acquired AOL in 2015 and Yahoo! in 2017).
While growth is a challenge, the company’s high dividend remains in good shape. Verizon and its predecessors have paid uninterrupted dividends for more than 30 years while increasing dividends for 11 consecutive years.
Management also announced a $10 billion cost savings plan which it believes will fund the company’s dividend through cash savings in 2022, and U.S. tax reform is expected to generate several billion dollars of additional cash flow in 2018 that will be used to reduce debt.
Verizon’s dividend has grown by 4.5% per year over the last decade, but annual dividend growth has decelerated to closer to 2% more recently. Going forward, Verizon’s dividend will likely continue growing by 2% to 3% per year.
Sector: Real Estate Industry: Retail REIT Dividend Yield: 4.4% Forward P/E Ratio: 16.9 (as of 9/4/18) Dividend Safety Score: 93 Dividend Growth Streak: 28 years
National Retail Properties is a real estate investment trust that was founded in 1984. The REIT owns and develops properties and leases them under long-term contracts to retail tenants. It has more than 2,500 properties spread across 48 U.S. states which are leased to more than 400 diverse tenants across 37 lines of trade.
The REIT originates single-tenant triple-net leases to customers across different sectors with convenience stores contributing to 17% of its annual rent, full-service restaurants (12%), limited service restaurants (8%), auto service (7%), family entertainment centers (6%), and health and fitness (6%).
Roughly 60% of National Retail Properties’ rent comes from its top 25 tenants, most of which have stable businesses with a weighted average rent coverage ratio of 3.6x.
In addition to its large customer base, National Retail Properties has a strong competitive advantage in the form of its geographically diversified and well-located properties. The company’s occupancy rate has never dipped below 96.4% over the last 13 years, for example.
National Retail’s average remaining lease term is 11.6 years and more than 60% of leases are not due for renewal in the next eight years, providing great cash flow visibility. Management also maintains a very conservative amount of financial leverage for a REIT, lessening its dependence on capital markets for growth financing.
National Retail Properties has paid higher dividends for the last 28 consecutive years and has increased its dividend by 2.1% per year over the last two decades. Management most recently boosted the firm's dividend by 4.2% in July 2018.
Since REITs pay out most of their income as a dividend and are generally mature, capital-intensive businesses, dividend growth is often relatively low but reliable. National Retail’s dividend will likely continue growing at a 2-4% annual pace.
Sector: Real Estate Industry: Retail REIT Dividend Yield: 4.5% Forward P/E Ratio: 18.1 (as of 9/4/18)
Dividend Safety Score: 72 Dividend Growth Streak: 25 years
Realty Income is a real estate investment trust that was founded in 1969 and is mainly engaged in the asset management of commercial properties in the U.S.
The company’s portfolio consists of more than 5,000 properties across 49 states, a large majority of which are single-tenant properties.
Realty Income has over 250 commercial tenants (the largest is just 7% of rent) from more than 45different industries, providing the company with excellent cash flow diversification.
Real estate is all about “location, location, location” (especially in retail, which accounts for 80% of the company’s rental revenue). A property’s location is its biggest value driver.
Realty Income’s strategy of purchasing freestanding, single-tenant properties in key locations has given it a strong competitive advantage. A consistently high occupancy ratio (>96%) indicates the success of its portfolio strategy.
The company’s revenues are predictable and secure with all its properties rented out under long-term leases to a well-diversified customer base spread across different industries and states.
The cash flows are also stable as customers mostly belong to the non-discretionary service industry, with 40% of the revenue also coming from customers with investment-grade credit ratings.
REITs have to pay out 90% of their income under law as dividends, which imply that they have to rely on debt and equity issuance to fund growth.
However, with a conservative capital structure, Realty Income has plenty of room to raise money and buy more properties to fuel growth.
Turning to the dividend, Realty Income has great record, growing dividends by 5.3% per year over the last 20 years and paying consecutive monthly dividends for nearly 50 years.
High dividend stock investors can likely expect future dividend growth of 3-5% per year going forward, similar to the company’s earnings growth trajectory.
Sector: Utilities Industry: Electric Power Dividend Yield: 4.6% Forward P/E Ratio: 17.2 (as of 9/4/18)
Dividend Safety Score: 80 Dividend Growth Streak: 13 years
Founded in the early 1900s, Duke Energy has become the largest electric utility in the country. The company’s operations span across the Southeast and Midwest to serve approximately 7.6 million electric customers and 1.6 million gas customers.
Regulated electric utilities account for 89% of Duke Energy’s earnings, but the company also has a fast-growing gas infrastructure and utilities business (8%) and a commercial portfolio of renewables (3%).
Management sold Duke Energy’s international energy business (which was 5% of earnings) in 2016 to reduce its earnings volatility and focus the company completely on its core domestic operations.
Many utility companies are basically government regulated monopolies in the regions they operate in. Almost all of Duke’s utilities operate as sole suppliers within their service territories, for example.
The extremely high cost of building and maintaining power plants, transmission lines, and distribution networks makes it uneconomical to have more than one utility supplier in most regions.
However, the price regulated utilities can charge to customers is controlled by state commissions.
Fortunately, Duke Energy operates in geographic areas with generally favorable demographics and constructive regulatory frameworks.
The company’s customer base has consistently expanded by close to 1% per year, and Duke Energy has earned a stable and healthy return on equity between 9% and 11% in each of its regions.
With nearly all of its profits generated from core regulated operations, Duke Energy’s business is very safe and predictable with high entry barriers. The company’s recent acquisition of Piedmont Natural Gas will also help it continue shifting towards cleaner forms of electricity generation while also providing more opportunities for growth in natural gas infrastructure.
Duke Energy has paid quarterly dividends for more than 90 years and has increased its dividend each year since 2005, including a 4.2% raise in July 2018.
The company has increased its dividend by about 2% per year over the last decade, but management recently doubled the dividend’s growth rate to 4% per year to reflect Duke Energy’s lower risk business mix and core earnings growth rate of 4-6% per year.
Assuming Duke Energy’s growth projects go as expected, investors should be safe to assume about 4% annual dividend growth the next few years.
Sector: Utilities Industry: Electric Power Dividend Yield: 4.7% Forward P/E Ratio: 17.6 (as of 9/4/18)
Dividend Safety Score: 75 Dividend Growth Streak: 15 years
Dominion was founded in 1909 and is one of the biggest producers and transporters of energy. The company provides electricity and natural gas to more than 5 million customers located primarily in the eastern United States.
Dominion Energy’s $6 billion acquisition of Questar, a Rockies-based integrated natural gas distribution company, gave Dominion better balance between its electric and gas operations while also improving the company’s scale and diversification by geography and regulatory jurisdiction.
It’s also worth noting that the company formed Dominion Midstream (DM), a master limited partnership, in 2014 to create a portfolio of natural gas transportation, processing, and storage assets. This further enhanced Dominion’s earnings growth profile relative to traditional regulated utility companies.
Dominion Energy had planned to drop down substantial midstream assets to Dominion Midstream, using the cash proceeds from the MLP to deleverage. However, as a result of the plunge in Dominion Midstream’s stock price, it no longer seems viable for the partnership to issue equity capital, and its ability to raise debt at reasonable interest rates is also uncertain.
There is a lot of uncertainty over Dominion Midstream’s future, which influences Dominion Energy’s efforts to deleverage since it may no longer receive as much cash from its MLP as expected (most notably its planned dropdown for Cove Point).
Dominion issued a press release on March 27 reaffirming its earnings and dividend guidance through 2020 (with at least 5% annual operating income growth expected thereafter). The company plans to issue new shares worth about $1.5 billion and pursue non-core asset sales, which management believes will allow the business to achieve its leverage ratio two years ahead of plan and complete its planned equity issuance for 2018 and 2019.
Additionally, it’s important to remember that approximately 90% of Dominion’s operations are regulated, allowing it to generate stable earnings and predictable returns on its invested capital. Utility companies also make for nice high yield retirement investments because they sell non-discretionary services and tend to fare relatively well during recessions (Dominion’s stock outperformed the S&P 500 by 15% in 2008).
While Dominion is dealing with some uncertainties today, its dividend growth has been impressive and dependable. The company has raised its dividend every year since 2004, recording 7% annual dividend growth over the last decade.
At least mid-single-digit dividend growth seems likely over the coming years as Dominion executes on its large backlog of growth projects. In fact, management remains confident that it will be able to deliver 10% annual payout growth through 2020 as its growth projects start reaching completion in 2018 and 2019.
Dominion took many investors by surprise when it announced plans to acquire the South Carolina utility company SCANA (SCG) in a $14.6 billion deal on January 3.
SCANA ran into trouble when regulators decided to consider suspending over $440 million per year in rates that the company charges customers for its failed nuclear reactor units.
SCANA and its partner Santee Cooper spent the past decade building these reactors for roughly $10 billion, but the project isn’t even half-finished today. Worse, $9 billion to $16 billion was estimated to be needed to finish the work. As a result, the companies decided to pull the plug on the project.
SCANA was being investigated for its handling of construction of the reactors, and regulators were looking at suspending a rate hike that was previously approved to help SCANA collect a portion of the billions of dollars it already spent on this unfinished work (the company continued taking payments).
Simply put, SCANA found itself in a position of severe distress. The company’s stock price tumbled nearly 50% until Dominion stepped in with a bid, looking to capitalize on a unique opportunity. The question many investors have now is what they should do with SCANA and Dominion.
Dominion is taking a bit of a gamble on this deal but couldn’t pass up the opportunity to acquire a set of otherwise quality assets at a bargain price. In fact, The Wall Street Journal noted that Dominion is paying around $7.4 billion (excluding debt) for a company that would have cost it closer to $14 billion last summer with a similar deal premium.
If regulators sign off on Dominion’s proposal (SCANA shareholders voted to merge with Dominion in July 2018), it would lift away significant uncertainty and add an attractive core utility franchise to the company’s regulated footprint. Specifically, Dominion’s base of regulated electric and gas customers would grow by 27% and 40%, respectively.
Despite the company’s high payouts and its assumption of SCANA’s debt, Dominion expects the deal to be immediately accretive (i.e. it will boost earnings per share) once it closes in the third quarter of 2018. Management believes Dominion’s 2017-2020 EPS compound annual growth rate will also rise to at least 8% from a previous range of 6% to 8%, and the outlook for 10% annual dividend growth through 2020 remain intact.
Overall, I like the increased scale, diversification, and regulated utility operations that Dominion will enjoy. I also appreciate that the transaction is contingent upon regulatory approval for Dominion’s nuclear solution, reducing some of the risk that SCANA faces, and that management remains committed to deleveraging.
I do have some reservations about the unknown liabilities Dominion could be inheriting related to SCANA’s partially-completed nuclear plant, depending on what type of cleanup and restoration work the government might require in the future. It will take years before the outcome of this merger can be judged, so ultra-conservative investors may be better off on the sidelines for now.
The investment case for Dominion Energy has become complicated over the past year year (the acquisition of SCANA, the selloff in utilities, and now the regulatory change affecting certain MLPs).
Dominion Energy’s management team still deserves the benefit of the doubt for now, but the company is certainly dealing with some unexpected challenges (although none of them should jeopardize the dividend’s safety).
Sector: Utilities Industry: Electric Power – MLP Dividend Yield: 4.8% Forward P/E Ratio: 9.9 (as of 9/4/18)
Dividend Safety Score: 65 Dividend Growth Streak: 11 years
Brookfield Infrastructure Partners is one of the fastest-growing and most diverse utility companies in the world.
The limited partnership (a corporate structure similar to that of a MLP) owns over 30 infrastructure assets, including electrical transmission lines, railroads, ports, natural gas pipelines, toll roads, telecom towers, and natural gas and electricity connections.
Most recently, the firm agreed to acquire Enercare, a furnace and water heater provider based in Canada, for about $4 billion, including debt. While Enercare is different from many other businesses in Brookfield Infrastructure's portfolio, the company generates stable, long-term cash flows through equipment rentals to a large and well-established customer base.
Brookfield Infrastructure Partners’ healthy diversification by business segment (no business unit is more than 20% of cash flow) and geography helps to ensure very predictable cash flows to secure the safety and growth of its distribution (a tax-deferred form of dividend).
That’s especially true since around 90% of the company’s cash flow is secured by either long-term, fixed rate contracts (with annual inflation adjustments) or is derived in regulated industries.
The firm has successfully paid distributions since its inception in 2008 and has increased its distribution by 11.9% per year over the last five years.
Brookfield Infrastructure Partners intends to pay out 60-70% of its funds from operations (FFO) and targets annual distribution increases of 5-9% per year.
Given the strong growth runway ahead of BIP in the coming years as infrastructure investment continues around the world, income investors could likely even expect long-term distribution growth at the higher end of management’s target range.
Sector: Energy Industry: Oil and Gas Storage and Transportation Dividend Yield: 5.0% Forward P/E Ratio: 14.8 (as of 9/4/18)
Dividend Safety Score: 50 Dividend Growth Streak: 16 years
ONEOK is one of the largest energy midstream service providers in America. The firm’s natural gas pipelines and storage facilities connect to over 140 gas processing facilities across the country, making it a valuable partner for its natural gas liquids (NGL) customers.
Pipelines are very costly and time consuming to construct, must comply with strict regulations, have few substitutes given their cost efficiency, and enjoy relatively stable demand since many of the products that require refined oil and gas are non-discretionary in nature. In other words, this can be an industry where the most disciplined and skilled operators generate very stable and growing cash flow (and dividends) over time.
ONEOK is no exception. Management has increasingly focused the business on long-term contracts, which typically run seven to 10 years and are fixed-rate, inflation-adjusted deals to ensure steady cash flow. Less than 10% of the company’s cash flow is subject to commodity prices or volumes on its systems today, down from more than 30% in 2013.
The company is very conservative with its balance sheet as well. Thanks to deleveraging efforts in recent years, ONEOK earns a stable BBB investment grade credit rating from Standard & Poor’s. The firm’s distribution coverage ratio also stands near 1.3, which is strong for the midstream industry and helps support management’s target of delivering 9% to 11% annual dividend growth through the end of 2021.
As North American energy production continues to rise and ONEOK executes on its growth backlog, the firm appears to be well-positioned to continue rewarding shareholders with generous dividends. And unlike many other players in this space, ONEOK is a C corporation that pays dividends (not distributions) and issues a simple 1099 instead of a K-1 form each year.
Sector: Real Estate Industry: Healthcare REIT Dividend Yield: 5.1% Forward P/E Ratio: 15.0 (as of 9/4/18)
Dividend Safety Score: 75 Dividend Growth Streak: 16 years
National Health Investors is a self-managed real estate investment trust that was incorporated in 1991. It is engaged in the ownership and financing of healthcare properties such as assisted living facilities, senior living campuses, skilled nursing facilities, specialty hospitals, entrance-fee communities and medical office buildings
The REIT owns a diversified portfolio of over 200 properties, of which approximately 60% are senior housing properties while the rest primarily consist of skilled nursing facilities. National Health rents these properties to around 30 healthcare operators under long-term leases with annual escalators that make the cash flow more secure and predictable.
National Health Investors has a business model which is almost immune to the vagaries of the economic cycle, given that its operators provide essential healthcare services. The rapidly-growing aging population provides a lot of fuel for long-term growth, too. In fact, the 75+ year-old population is expected to double over the next 20 years.
The REIT has increased its dividend for 16 consecutive years and has delivered 6.5% annual dividend growth over the past decade. Income investors can likely expect mid-single-digit dividend growth to continue.
Sector: Real Estate Industry: Healthcare Dividend Yield: 5.3% Forward P/E Ratio: 16.8 (as of 9/4/18)
Dividend Safety Score: 70 Dividend Growth Streak: 8 years
Ventas is a healthcare real estate investment trust. It invests in properties located in the United States, Canada, and the United Kingdom and is one of the largest healthcare REITs in America. Ventas earns approximately half of its revenue from triple-net leases, which are long-term in nature and have annual price escalators to help protect profits.
After spinning off its skilled nursing facility properties into a separate REIT (Care Capital Properties) in 2015, Ventas owns a quality portfolio of more than 1,200 properties, including seniors housing (53% of net operating income), medical offices (20%), specialty hospitals (7%), life science (6%), and acute care hospitals (5%).
With an aging population, the demand for healthcare and senior living services will continue to be robust. The company’s properties should benefit as healthcare spending is expected to grow 5.8% annually through 2024.
Ventas also has strong potential for growth in U.S. because less than 15% of U.S. medical assets are owned by medical REITs today. Compared to other industries, healthcare REITs control a relatively small percentage of real estate assets in this $1 trillion market and should have opportunities for continued consolidation.
With a diversified portfolio of healthcare properties, one of the strongest balance sheets of any REIT, and favorable demographic trends behind it, Ventas is well-positioned to continue growing through acquisitions while paying safe, steadily increasing dividends.
Ventas has paid uninterrupted dividends since going public in 1999 and increased its dividend by 8% per year since 2001.
While the company’s most recent dividend increase was small as a result of its Care Capital Properties spinoff, which reduced cash flow per share, long-term investors can likely expect continued 5% to 6% annual dividend growth over the coming years when the senior housing market sees more of its supply get absorbed.
Sector: Real Estate Industry: Healthcare REITs Dividend Yield: 5.3% Forward P/E Ratio: 17.2 (as of 9/4/18)
Dividend Safety Score: 70 Dividend Growth Streak: 14 years
Welltower is one of the largest medical REITs in America. The company was founded in 1970, and Welltower is involved in practically every aspect of patient care, from hospitals and skilled nursing facilities to senior assisted living communities and medical office buildings.
Welltower’s business segments are long-term post-acute care (11% of operating income), outpatient medical (17%), and senior housing (72%). The company owns a diversified portfolio of approximately 1,500 properties located primarily in major cities across the U.S., Canada, and the U.K.
Welltower makes money renting out its high-quality portfolio of medical properties under long-term contracts to a diverse group of partners, such as Sunrise Senior Living and Revera, which are the companies actually caring for patients. Approximately 95% of its facility revenue is derived from private pay rather than Medicare and Medicaid, reducing its sensitivity to changes in governmental policies.
Thanks to its long-term contracts and the essential services provided by its tenants, Welltower has a recession-proof business that generates secure and predictable cash flow (sales grew each year during the financial crisis).
An aging American population is the key to Welltower’s growth. In fact, America is expected to see its 75+ year old population double over the next two decades. With an increasing aging population and growing health awareness amongst people, aggregate health expenditures are anticipated to continue rising for the foreseeable future.
REITs are very popular with income investors because they are required to pay out almost all of their taxable earnings as dividends. Welltower is no exception and has been distributing uninterrupted dividends since making its first payment in 1971.
The company has even increased its dividend in most years throughout its history, growing its dividend by about 3% annually over the past five years and over the last two decades.
Welltower’s dividend has increased every year since 2004, and continued low to mid-single-digit dividend growth seems likely to continue, matching growth in Welltower’s underlying cash flow.
Smoking has been in decline for many years, but Altria has remained one of the best dividend growth stocks on Wall Street thanks to its strong brands, excellent pricing power, continuous cost cutting, and large scale.
In fact, Altria’s market share in U.S. cigarettes and smokeless tobacco is above 50%. Marlboro’s market share is even greater than the next 10 largest brands combined!
The company’s supply chain, distribution system, and marketing network are unmatched, and its high market share and strong brand recognition provide Altria with excellent pricing power, which more than offsets the steady decline in volumes from lower tobacco use.
Altria has increased its dividend 53 times in the past 49 years, recording annual dividend growth around 8% to 9% during the past five years.
Given management’s 80% payout ratio target and Altria’s potential for upper single-digit earnings growth, the company seems likely to continue rewarding dividend growth investors with mid-single-digit payout growth going forward, at least until more information is known about the FDA’s announcement.
Management appears to remain confident in the company's long-term prospects. Altria raised its dividend by 8% in October 2017, announced an additional dividend increase of 6% just six months later in March 2018, and boosted the dividend by another 14% in August 2018.
However, tobacco stocks could remain more volatile than in the past as investors assess the growth potential of cigarette alternatives (e-cigarettes, heat-not-burn devices, etc.) which are increasingly important as smoking rates decline around the world.
Sector: Utilities Industry: Electric Power Dividend Yield: 5.5% Forward P/E Ratio: 13.0 (as of 9/4/18)
Dividend Safety Score: 65 Dividend Growth Streak: 17 years
PPL is a pure-play regulated utility company involved in the electricity distribution business in Pennsylvania, Kentucky, Virginia, and Tennessee, as well as the United Kingdom. It also has a natural gas transmission and power generation business in Kentucky.
The company has over 10 million utility customers in the U.S. and U.K. and has more than 100 years of operating experience.
PPL’s transmission and distribution infrastructure are its growth drivers. Compared to the average U.S. utility, PPL receives a higher return on equity in the U.K. and from its transmission infrastructure in Kentucky and Pennsylvania.
Since most of the company’s revenues come from regulated operations, its earnings are highly secure and predictable. In fact, PPL’s sales dipped by just 5% during the financial crisis, and the company continued raising its dividend each year.
PPL also has good regulatory and geographic diversification with more than 57% of its earnings from the U.K., 25% from Kentucky, and 23% from Pennsylvania.
The stock has sold off sharply over the last year despite issuing decent earnings reports and increasing its dividend close by close to 4% earlier in 2018.
Investors seem most worried about the company’s U.K. business. Specifically, currency exchange rate headwinds and potential regulatory knock-on effects from Brexit are top of mind.
On the currency front, the pound weakened during 2017, reducing the amount of profits PPL reports in U.S. dollars. Fortunately, the company is fully hedged in 2018 and 2019, so it seems like management has properly addressed this risk to limit its impact. The latest trade wars talk could be impacting things as well (PPL plans to bring home $300 million to $500 million of cash flow generated in the U.K. each year to fund its corporate dividend), but it’s less clear how this will play out.
The even murkier issue is the U.K.’s regulatory framework for utilities, especially in light of the evolving political environment. PPL’s U.K. utilities currently operate under a regulatory framework that runs through 2023, providing a predictable rate of return on its projects assuming nothing changes.
However, there appears to be increased concerns about the price of electricity, with talks of implementing price caps on energy bills. The good news is that PPL’s business in the U.K. is focused on transmission, not power generation. In other words, PPLs’ operations would seem to be a relatively lower contributor to the overall price of electricity, but there is still a good deal of uncertainty.
A material revision to the current regulatory framework in the U.K. is not expected but would obviously be bad news for PPL given its major growth projects in the region, relatively high debt load, and payout ratio near 70%. In April 2018, U.K. utility regulator Ofgem decided to forgo any mid-period review of utility requirements or revenues, providing more confidence for PPL’s short to medium-term outlook.
Investors can read our analysis of PPL’s recent underperformance here.
PPL has grown dividends at an annual rate of 3.3% over the last decade. Its earnings per share are expected to grow at 5-6% per year through 2020, with PPL’s rate base also growing around 5% annually between 2017 and 2020.
As a result, PPL seems likely to have sufficient resources to increase its dividend by a planned 4% per year through the end of the decade, outpacing the rate of inflation to protect income investors’ purchasing power.
The company last increased its dividend by 4% in February 2018, in line with PPL’s commitment to raise dividends by 4% annually. This marks the company’s 17th consecutive annual dividend increase.
Sector: Utilities Industry: Electric Power Dividend Yield: 5.5% Forward P/E Ratio: 15.8 (as of 9/4/18)
Dividend Safety Score: 67 Dividend Growth Streak: 17 years
Southern Company is one of the largest producers of electricity in the U.S. and has been in business for more than 100 years. The Atlanta-based company has more than 100 years of experience and provides service to more than 9 million customers, split about equally between electric and gas.
Southern Company owns electric utilities in the southeastern U.S. and has natural gas distribution utilities in seven states. Since about 90% of Southern Company’s earnings come from regulated subsidiaries, its cash flows are safe, regular, and reliable.
Regulated utility businesses also require huge amount of investment in the construction of power plants, transmission lines and distribution networks. This creates high barriers to entry and low business risks because people will continue buying electricity even during a recession.
Additionally, Southern Company enjoys a favorable regulatory framework in the Southeast region and operates in four of the top eight friendly states in the U.S. This helps ensure that the company will earn a fair return on its large investments.
The company’s $8 billion acquisition of AGL Resources in 2016 has further diversified Southern Company’s operating assets (natural gas capacity), areas of operations (Midwest region), and regulatory risk. The combined entity has a more balanced electric and gas customer mix and bigger geographical footprint, which further reduces its risk profile while providing new growth opportunities.
With that said, income investors need to be aware that Southern Company is facing a number of challenges with several multibillion dollar projects.
Most notably, the company’s Vogtle nuclear plant in Georgia was challenged by additional costs and delays after a major supplier (Toshiba’s Westinghouse) declared bankruptcy last year.
Fortunately, the U.S. Department of Energy announced the Vogtle project will receive an additional $3.7 billion in loan guarantees, and state commissions gave their blessing for the project to continue under Southern’s revised budget and timeline. Our thesis (linked below) contains more information on these major projects.
Investors favor utility stocks because of their safe and regular dividend payouts. Southern Company has paid uninterrupted quarterly dividends for more than 65 consecutive years and grown its dividend at a 3.7% annual rate over the past decade.
Following the AGL acquisition, Southern Company is expected to grow earnings per share around 4-5% per year. This implies that the utility should be able to keep increasing its dividend by 3-4% annually, which is exactly what management did in April 2018 when the team announced a 3.5% payout raise. The company’s 17-year dividend growth streak will likely continue for years to come.
Sector: Energy Industry: Oil & Gas Production MLP Dividend Yield: 5.6% Forward P/E Ratio: 13.8 (as of 9/4/18)
Dividend Safety Score: 61 Dividend Growth Streak: 18 years
Magellan Midstream Partners engages in the transportation, storage, and distribution of crude oil and refined petroleum products. Unlike most MLPs, the partnership enjoys an investment-grade credit rating and has no incentive distribution rights, retaining all of its cash flow.
The company’s refined products business accounts for 60% of total operating profits, with crude oil (31%) and marine storage (9%) making up the remainder. Magellan enjoys primarily fee-based revenue that comes from an attractive portfolio of energy infrastructure assets.
Magellan’s cash flow is largely recurring in nature and offers a cushion to the partnership from oil and gas price weakness because profits are primarily driven by throughput volume and tariffs.
Magellan Midstream Partners also owns the longest refined petroleum products pipeline system in the U.S. and has access to roughly half of the country’s refining capacity, providing numerous growth opportunities.
The partnership also has 100 million barrels of storage capacity for petroleum products. Magellan’s strategic advantage lies in the massive transportation and storage infrastructure, which has been built over the years in strategic locations and prevents most new competition from challenging it.
Magellan Midstream Partners has a strong track record of distribution growth, too. The partnership successfully increased its cash distributions even during periods characterized by unfavorable commodity prices, proving its resilience even in tough times.
The partnership has grown its dividend consistently for more than 15 years in a row following its IPO. Magellan’s dividend increased by 11% per year over the last decade, and management targets 8% annual distribution growth over the next few years
Magellan Midstream Partners is a good choice for long-term investors who are risk averse but want some of the high income provided by MLPs. The partnership focuses on expansion opportunities in a disciplined manner, which seems likely to continue fueling upper single-digits dividend growth.
The partnership also does not expect a material impact from the revised policy statement by the Federal Energy Regulatory Commission to disallow income tax allowance cost recovery in rates charged by pipeline companies organized as master limited partnerships.
Sector: Real Estate Industry: Retail REIT Dividend Yield: 5.8% Forward P/E Ratio: 12.6 (as of 9/4/18)
Dividend Safety Score: 70 Dividend Growth Streak: 24 years
Founded in 1981, Tanger Factory Outlet Centers is a REIT that develops, owns (including 50% stakes), and operates more than 40 upscale outlet shopping centers.
Tanger’s 3,100 store locations can be found across 22 coastal states in the U.S. and Canada and are leased out to more than 500 high-end retailers. No tenant accounts for more than 8% of total rental revenues, and Tanger has historically had no trouble filling its locations with an occupancy rate above 95% since 1981.
With more than three decades of experience in the outlet industry, Tanger has developed a strong brand and established long-standing relationships with many of its tenants. Its tenant base is also diverse and comprises of well-known brands such as Banana Republic Factory Store, Barneys New York, Brooks Brothers, Calvin Klein, Coach, Gap Outlet, Giorgio Armani, Hugo Boss Factory Store, and others.
Its outlet centers house popular brands together at one place, which is quite convenient for customers and enables greater foot traffic (more than 188 million shoppers visiting its centers last year). Tanger’s industry experience, extensive development expertise, and strong retail relationships are its key competitive advantages.
While many mall-based retailers are struggling in the age of Amazon, Tanger’s exclusive focus on premium outlet centers, where high-end retailers offer deeply discounted clearance items, remains a differentiating factor. The company has also invested heavily to turn its malls into more of experience centers, embracing the latest in technology and luxury.
As a result, the company has thus far been able to maintain one of the industry’s best occupancy rates (95%+) while continuing to raise rent on expiring leases and realize same-center net operating income growth each quarter.
Tanger has been increasing dividends for 25 consecutive years and last raised its payout by 2.2% in April 2018. Its dividend has grown by 9.8% annually over the last five years and will likely increase at a low to mid-single-digit annual pace going forward.
Dividend Safety Score: 70 Dividend Growth Streak: 7 years
Founded in Texas during the mid-1990s, Main Street Capital is an investment firm that provides long-term debt and equity to lower middle market companies (businesses with annual EBITDA between $3 million and $20 million) and debt to middle market companies.
The company provides financial services to support management buyouts, recapitalizations, growth financing, and acquisitions.
Main Street Capital has $3.7 billion of capital under management and its portfolio consists of approximately 200 companies, with an average investment size of $10 million. The company’s investment portfolio comprises of lower middle market companies (45%), middle market (32%), private loan (17%) and other investments (6%).
Its investments are relatively safe with more than 85% of its debt investments secured through a first priority lien. The overall investment portfolio is diversified across geographies, industries, end markets, transaction type, etc., helping insulate Main Street Capital from distress in any single company or industry sector.
The firm’s other key competitive advantage is its low cost of borrowing. Main Street Capital owns licenses for three small business investment company (SBIC) funds, which provides access to $350 million of low cost, fixed rate (4.1% p.a.) government-backed leverage.
The company maintains an investment grade rating from S&P as well, and its internally-managed operating structure further reduces its costs.
Main Street Capital is also not required to return its investors’ capital by a specific date, thus allowing more flexibility and potential for higher investment returns.
Since its October 2007 IPO, Main Street has consistently paid monthly dividends to its investors. Impressively, Main Street has never cut its dividend or paid a return of capital distribution.
The company has increased dividend at 9.9% annual rate over the last five years and most recently increased its monthly dividend by 2.6% in August 2018.
The company’s regular dividend will likely continue growing at a low single-digit pace, but management frequently issues supplementary semi-annual dividends to further boost income growth.
Dividend Safety Score: 70 Dividend Growth Streak: 10 years
Philip Morris International is one of the largest tobacco companies in the world, selling cigarettes in over 180 countries. The company was born in 2008 after Altria (MO) spun off its international operations to create this new entity.
Philip Morris sells cigarettes to more than 150 million consumers worldwide and owns six of the world’s top 15 international brands. Marlboro is both the company’s and the world’s number one brand.
The company’s competitive moat is derived from its ownership of the international rights of globally renowned cigarette brands such as Virginia Slims, Red & White, and Marlboro.
This has allowed the company to capture a nearly 30% share of the global market and enjoy significant pricing power. In fact, Philip Morris’ annual average pricing gain has been 6% since 2008.
Philip Morris has excellent geographic diversification as well, with Asia, the European Union, and EMEA each contributing between 25-35% of its total sales. This insulates the company from the imposition of strong anti-smoking laws in any single region.
The company’s sole focus on markets outside of the U.S. also helped protect its stock when in July 2017 the U.S. FDA announced plans to explore lowering the nicotine allowed in cigarettes to non-addictive levels.
However, Philip Morris slumped nearly 20% in April 2018 after reporting slowing sales growth for its IQOS heat sticks, which don’t burn tobacco and are expected to ultimately be the replacement of choice for many smokers around the world. The company’s long-term growth outlook is certainly murkier if this trend continues, especially as smoking volumes decline, but Philip Morris’ fundamentals remain strong and supportive of its dividend.
Philip Morris has grown dividends every year since 2008, averaging 7.9% annual income growth over the last five years. However, dividend growth has slowed more recently to a low single-digit rate, including a 2.9% raise in 2017. To demonstrate their confidence in the business despite investors’ growth fears, management announced an accelerated 6.5% dividend increase in June 2018.
Sales volumes are falling as the cigarette industry is in a secular decline, but earnings per share should still grow at a mid-single-digit annual rate thanks to a mix of higher prices, lower costs, and an increasing focus on smoke-free products, which account for more than 70% of the firm’s R&D expenditure.
Considering some of the growth headwinds facing the business and Philip Morris’ relatively high payout ratio, income investors should realistically expect annual dividend growth closer to 3-5% going forward.
Sector: Energy Industry: Oil & Gas Production MLP Dividend Yield: 5.9% Forward P/E Ratio: 11.6 (as of 9/4/18)
Dividend Safety Score: 71 Dividend Growth Streak: 21 years
Enterprise Products Partners is one of the largest integrated midstream energy companies in North American. It owns 50,000 miles of pipelines, 27 natural gas processing plants, 22 NGL and propylene fractionators, 14 billion cubic feet of natural gas storage capacity, and 260 million barrels of other storage capacity. The partnership also has a marine transportation business.
Natural gas liquids (NGLs) transportation and processing provides the bulk of Enterprise Products Partners’ gross profit. The partnership is doubling down in this area because the shale gas boom has resulted in such an abundance of NGLs (which are used to make plastics) that there is a large, growing export market for refined NGL products in Asia and Europe.
Crude oil pipelines & services (17%) and petrochemical & refined products and services (13%) are other important business units.
Overall, the company has a strong business model with long-term transportation contracts and a base of blue chip customers. The partnership has business relations with major oil, natural gas, and petrochemical companies such as BP, Chevron, ConocoPhillips, Dow Chemical, ExxonMobil, and Shell.
Over half of the firm’s customers have an investment grade credit rating, which makes them better able to continue honoring their contracts even during periods of depressed energy prices.
The partnership also has a large, integrated network of diversified assets in strategic locations. It takes substantial amounts of time and capital to build a grid of pipelines, which results in high barriers to entry.
Enterprise Products Partners’ cash flows are also fee based and long term in nature, thus making them less vulnerable to energy price volatility. With no incentive distribution rights, a solid BBB+ credit rating, and average distribution coverage of 1.2 times, Enterprise Products Partners is one of the most conservative MLPs in the sector.
The company has raised its dividend every year since going public in 1998 and has increased its dividend by 5.9% per year over the last decade. Going forward, income investors can likely expect annual dividend growth of approximately 5%.
Also note that management does not expect the revisions announced by the Federal Energy Regulatory Commission with regard to its 2005 policy for recovery of income taxes to have a material impact on the partnership’s earnings and cash flow.
Sector: Energy Industry: Oil and Gas Storage and Transportation Dividend Yield: 6.0% Forward P/E Ratio: 15.4 (as of 9/4/18)
Dividend Safety Score: 55 Dividend Growth Streak: 23 years
Enbridge was founded in 1949 and is the largest midstream energy company in North America today. The business is involved in gathering, storing, processing, and transporting oil and gas across some of the continent’s most vital energy-producing regions.
Enbridge is structured as a conglomerate, composed of numerous subsidiary MLPs and energy funds. However, the company is more than a midstream energy business. After acquiring Spectra Energy (including Union Gas) in 2016 for $22 billion, for example, Enbridge became one of the largest natural gas utilities in Canada.
The company’s primary businesses enjoy defensive characteristics that have helped Enbridge reliably pay uninterrupted dividends for more than two decades.
The pipeline business is extremely capital intensive, must comply with complex regulations (limiting new entrants), and benefits from long-term, take or pay contracts that have limited volume risk and almost no direct exposure to volatile commodity prices.
On the utility side, Enbridge enjoys predictable regulated returns on its investments. This is a recession-resistant industry that essentially operates as a government-sanctioned monopoly. Enbridge has solid relationships with regulators and enjoys a return on its investments near 10%, which is one of the highest rates in the sector.
Enbridge has increased its dividend for 23 consecutive years (including this year), recording 11% annualized payout growth over that time. Dividend growth remains strong as management announced another 10% payout hike for 2018. In fact, Enbridge plans to grow its dividend by 10% annually through 2020 as the company plows ahead with its substantial growth projects.
With a targeted adjusted cash flow from operations payout ratio of 65% or less, the company’s dividend is on solid ground and should provide plenty of financial flexibility as Enbridge pours capital into its development projects.
Enbridge also does not expect a material impact to its 2018-2020 guidance as a result of the Federal Energy Regulatory Commission revised policy statement on interstate pipeline tax allowance recovery in MLPs.
Finally, investors should note that Enbridge recently announced a proposal to roll-up its sponsored MLPs, including Spectra Energy Partners (SEP). Under the offer, investors in Spectra would exchange their units for shares in Enbridge. Enbridge expects the deal to have a neutral impact on its three-year financial guidance, with potential for positive impacts beyond 2020 thanks to tax and other synergies.
Recent changes to the U.S. tax code and a regulatory policy reversal have weighed on the appeal of the MLP structure for certain businesses over the past year. Here’s what Enbridge said:
“The recent FERC income tax allowance policy reversal and the regulatory rate impact from the U.S. Tax Cuts and Jobs Act (TCJA), as well as the market reactions across the MLP landscape, have challenged the standalone viability of SEP, EEP and EEQ as reliable and cost effective sources of capital to support Enbridge’s growth…Under the newly changed FERC tax policy, holding certain interstate pipelines in MLP structures is highly unfavorable to unitholders and is no longer advantageous for Enbridge or the U.S. MLPs. The combination of this changed policy and the negative capital markets reaction has impaired the MLP structure for Enbridge’s interstate pipelines. Without this restructuring, and in light of the challenging capital markets conditions and the resulting impact on MLP cash flows, Enbridge’s view is that EEP and SEP will face the cessation of distribution growth, and compromised distribution outlook to unitholders as early as 2019.”
MLPs possess a number of important risk factors to consider. Enbridge appears to remain one of the best firms in the pipeline industry and would presumably become even stronger (simplified corporate structure, cost savings, greater scale) should its roll-up plans succeed.
Sector: Real Estate Industry: Diversified REIT Dividend Yield: 6.1% Forward P/E Ratio: 11.9 (as of 9/4/18)
Dividend Safety Score: 61 Dividend Growth Streak: 21 years
W.P. Carey is a leading internally-managed net lease REIT that was founded in 1973 and converted to a REIT structure in 2012. It is one of the oldest REITs in the world and is regarded as the pioneer in the leaseback model of triple net REITs, which is generally viewed as a lower-risk business model.
W.P. Carey has nearly 900 properties leased to more than 200 customers in the U.S. (65% of assets) and Europe (35%). The company’s owns a mix of properties, including office (25%), industrial (30%), warehouse (14%), retail (16%), and self-storage (5%) space. These properties are leased out to a wide variety of sectors such as retail (18%), consumer services (11%), automotive (8%), and sovereign and public finance (6%).
Unlike most of its REIT peers, W.P. Carey operates as a hybrid of a traditional equity REIT as well as a private equity fund, which results in lumpy growth in revenue, cash flow, and dividends. Management sells properties when they become overvalued and reinvests the proceeds into more attractively priced assets. The company also operates a fast-growing investment management division, although this segment is less than 10% of total cash flow and is in the process of being wound down.
W.P. Carey has a solid business model with the portfolio nicely diversified by geography, property type, and industry. As a result, the company is protected from unfavorable developments in any single industry, tenant, property type, or region.
Like National Retail Properties, W.P. Carey also enters into triple net leases with customers for long periods (generally 20-25 years), leading to stable and predictable cash flows. The tenant is responsible for maintenance, taxes, and insurance in triple net lease contracts, thus saving the REIT from operating expenses.
With an occupancy rate of 99.8%, an average lease term of 9.5 years, and about 60% of its leases contracted until at least 2024, W.P. Carey enjoys a very predictable stream of cash flow to support its high dividend.
W.P. Carey has increased its dividend every year since the company went public in 1998. The company’s dividend has increased by 8% per year over the last decade, but dividend growth has decreased to a low single-digit pace more recently.
The deceleration is likely due to the REIT anticipating an eventual increase in interest rates, so most of the marginal cash flow is going to strengthen the balance sheet so that management can continue to grow the business into the future in an era of more costly debt.
While shareholders may have to accept relatively slow dividend growth in the next few years, that doesn’t necessarily mean that W.P. Carey isn’t a good long-term high-yield, dividend growth investment.
As the company has a history of purchasing the assets it manages but does not own, W.P. Carey can likely continue growing its dividend at a rate of 4% to 5% per year over the next decade.
Dividend Safety Score: 55 Dividend Growth Streak: 34 years
AT&T is the world’s largest telecom company with $160 billion revenue last year. The multinational communications and digital entertainment conglomerate is headquartered in Texas and was founded in 1875. AT&T provides mobile and fixed telephone services, data and internet services, and also pay-TV services through DirecTV.
The company operates through four divisions – Business Solutions (43% of sales), Entertainment (31%), Consumer Mobility (20%), and International (4%). Business Solutions accounts for just over half of the company’s total segment profit and includes wireless and voice services provided to corporations and governments.
AT&T has a strong competitive advantage being the second largest wireless solution provider in the U.S. The wireless industry is mature and has significant entry barriers owing to costly infrastructure and spectrum requirements.
Moreover, large companies like AT&T and Verizon enjoy strong brand recognition and have huge subscriber bases they can leverage to keep prices low enough to further discourage new entrants. The company is expected to roll out 5G wireless services this year to further strengthen its market position.
Unlike Verizon, AT&T has aggressively expanded its business outside of wireless services in recent years (wireless operations previously accounted for about 75% of the company’s income). AT&T acquired DirecTV for $49 billion in 2015 to become the largest pay-TV provider in the world and is focused on cost synergies and bundling its services to drive earnings higher.
AT&T also won its legal battle to acquire media giant Time Warner for $85 billion. Time Warner will account for about 15% of AT&T’s total revenues and add a new business for AT&T – content.
Over 100 million customers subscribe to AT&T’s TV, mobile, and broadband services, so AT&T’s bundled subscription packages and streaming services could be further differentiated with the increased content flexibility provided by Time Warner. AT&T could also enhance its advertising business with Time Warner’s assets.
AT&T is the only telecom company that is also a dividend aristocrat. The telecom giant has not only been paying dividends for 34 consecutive years but has also increased payments during this period.
AT&T’s dividend has grown by 3.7% per year over the last 10 years and will likely grow by 2-3% per year going forward as the company digests its large deals and restores the health of its balance sheet.
AT&T’s stock price has remained particularly weak since last fall as investors worried more about cord-cutting (the company reported a record traditional pay-TV subscriber loss) and the firm's rising financial leverage.
While AT&T carries a very high debt load, the company appears to remain on solid ground to continue paying its dividend. Management is also committed to the payout and expects to return leverage to historical levels within four years of the Time Warner deal closing.
Investors can read our latest take on AT&T’s acquisition of Time Warner and what it means for the company’s dividend here.
Dividend Safety Score: 53 Dividend Growth Streak: 6 years
Brookfield Renewable Partners LP is the renewable energy arm of Brookfield Asset Management (60% ownership), which is a major global infrastructure company operating in the Americas and Europe. Brookfield Renewable Partners business model is based on owning and operating renewable energy power plants.
Brookfield Renewable Partners has over 100 years of experience in power generation. Its global footprint extends to North America (60% of generation capacity), Brazil (20%), Colombia (15%), and Europe (5%).
The company has renewable energy capacity of more than 10,000 MW distributed across hydroelectricity (82%), wind energy (16%), solar (2%) and biomass energy.
Over 90% of the firm’s cash flows are contracted with credit-worthy counterparties, such as utilities, primarily under long-term power purchase agreements. Brookfield Renewable’s revenue is primarily correlated to the amount of electricity the company generates rather than wholesale electricity prices, providing solid cash flow visibility.
Brookfield Renewable Partners’ competitive edge is its large portfolio of assets located across growing countries. About 90% of the company’s cash flow is contracted for the next 15+ years, making for generally safe and predictable business results.
With growing interest in cleaner, more sustainable forms of power, many countries are increasing their use of renewable energy. The potential for growth in the renewable energy space is exponential, with 80% of all U.S. power expected to come from green sources by 2050.
Brookfield Renewable Partners could also potentially double its total generating capacity with the acquisition of TerraForm Power and TerraForm Global – two of SunEdison’s YieldCos.
YieldCos can offer strong income growth potential, and Brookfield Renewable Partners is no exception. The partnership expects to distribute 70% of its funds from operations and has an investment objective to deliver long-term total returns of 12-15% annually, including distribution growth of 5-9% per year.
Sector: Real Estate Industry: Business Services REIT Dividend Yield: 6.5% Forward P/E Ratio: 12.3 (as of 9/4/18)
Dividend Safety Score: 52 Dividend Growth Streak: 8 years
Founded in 1951, Iron Mountain is a real estate investment trust that stores and protects all sorts of information for more than 230,000 customers. From business documents and electronic files to medical data and fine art, Iron Mountain’s services cover a very wide range.
Records & Information Management accounts for 75% of revenue, followed by Data Management (15%) and Shredding (10%). Storage accounts for 81% of the company’s gross profits.
The company has a real estate network of more than 85 million square feet spanning across more than 1,400 facilities (leased and owned) in over 40 countries. Developed markets represent 85% of its total revenues with the balance from emerging markets. Storage rental revenues accounts for about 60% of total revenues, while service revenue is almost 40%.
A diversified customer base (95% are Fortune 1000 companies) and non-cyclical, recurring revenue are the company’s key competitive advantages. Iron Mountain also enjoys long-term customer relationships with typical lifespans averaging almost 50 years.
Operating storage facilities for businesses requires little maintenance capex and generally results in high customer retention rates. In fact, roughly 50% of boxes that were stored 15 years ago still remain in storage. These factors have helped Iron Mountain consistently generate positive free cash flow over the last decade.
For growth, the company is expanding in emerging markets in Europe, Asia, and Africa. It is in an advantageous position to invest in these markets because most of these countries have just started outsourcing records management and are early in the growth cycle.
Iron Mountain is also investing in new businesses such as data centers (protect digital information) and ancillary services (e.g. entertainment and fine art storage).
Management hopes emerging markets and adjacent businesses can account for 30% of total sales by 2020 (compared to 18% through the first half of 2018).
Turning to the dividend, Iron Mountain has grown its payout by 16.4% per year over the last five years.
Iron Mountain expects revenue growth of 8% to 10% and AFFO growth of 8% to 15% in 2017. After a 7% dividend boost in late 2017, the company plans to increase its dividend by 7% in 2018 and 4% annually thereafter.