Dividend stocks tend to produce steady growth with relatively low volatility. However, sometimes, even the best dividend stocks can lose value, even though their underlying businesses perform well. These declines are often buying opportunities as they increase your dividend yields.
Three dividend actions that currently stand out to our employees as incredible bargains are water utilities American Water Works (NYSE: AWK) and master limited partners (MLPs) Crestwood Equity Partners (NYSE: CEQP) and Enterprise product partners (NYSE: EPD).
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The other side of the coin
Reuben Gregg Brewer (Enterprise product partners): Investors are, from a broader perspective, concerned that the push towards clean energy will leave veterans in the carbon energy space, like the midstream giant Enterprise Products Partners, languishing. This is not unreasonable, given the shifting winds in Washington. But the company, which delivers 7.8%, is in a very strong position, even though difficult times are ahead for the energy sector in general.
With a market capitalization of $ 50 billion, this limited liability company is one of the largest midstream companies in North America. It has a broadly diversified portfolio of broadly fee-based assets that generate consistent cash flows to support its distribution. To put a number on that, it covered its distribution 1.6 times in the pandemic hit in 2020 (1.2 times has historically been considered strong coverage). Meanwhile, it has very low leverage in relation to its peers, so its balance is also rock solid. Looking at growth, it has $ 2.4 billion in capital investment projects planned in 2021 and 2022 to help boost financial and higher results.
EPD dividend yield data by YCharts
That said, the long-term demand for new projects may decline as clean energy becomes more prominent. But even in this scenario, the company can use its size, diversification and solid finances to buy smaller competitors. So, with the yield from the distribution still close to the upper limit of the Enterprise’s historical yield range, long-term investors should dive deep while Wall Street is still trying to figure out what the future holds for this well-positioned intermediary name.
A rock bottom assessment
Matt DiLallo (Crestwood Equity Partners): Crestwood Equity Partners’ units have fallen by more than 15% since the beginning of 2020. This fall occurs even though the MLP increased its earnings by 10% last year, despite a major challenge oil market. The company expects to produce at least the same level of revenue this year, with the potential to rise if volumes improve due to higher oil prices. With this, it is on its way to generate enough cash to cover its 9.7% income distribution and its growth capital program with plenty of room. This excess cash will increase your financial flexibility, while reducing your leverage ratio for the target range.
Assuming Crestwood reaches the midpoint of its 2021 guidance, it trades 7.5 times its earnings and 5.4 times its cash flow. Meanwhile, it is even cheaper, with 7.1 times earnings and five times cash flow at the upper limit of your forecast. The company said a sophisticated finish is increasingly feasible in an extended oil environment of $ 55 to $ 60, which seems likely, as oil is currently above $ 65 a barrel. These are very cheap levels for a company that is generating a lot of reasonably stable cash flow. He is on track to produce enough cash in 2021 to cover double his high-yield dividends. For this reason, it has a lot of financial flexibility to finance growth projects, make acquisitions and settle debts. This combination of low valuation, ultra-high yield and an improving balance sheet makes Crestwood look like an opportunity that income-focused investors will not want to miss.
Dividend growth that no one is looking at
Neha Chamaria (American Water Works): American Water Works shares fell nearly 17% last month, but I see absolutely no logic behind the fall, given the company’s unquestionably solid fundamentals. In contrast, American Water presented solid figures for 2020 and an extremely encouraging long-term outlook last month, making it an attractive dividend stock to consider buying while it is still cheap.
American Water is, in fact, one of the most underrated dividend stocks out there. Consider that the company has been increasing dividends every year since it went public in 2008 and talented shareholders an increase of 10% in 2020. These dividend increases are going nowhere: management is aiming for annual dividend increases at the end an increase of 7% to 10% between 2021 and 2025, supported by a similar growth in earnings per share.
There is little reason to believe that American Water will not achieve its financial goals. As the largest public water and sewage company in the United States, it has an excellent influence on a regulated essential services industry that is practically isolated from economic upheavals. While this ensures a steady flow of revenue and cash flows, the company consistently spends on infrastructure to obtain timely approvals for fee increases to increase its net revenue. For example, it expects growth of 7% to 10% on the basis of the rate until 2025.
While American Water’s 1.6% dividend yield may not be attractive, stock dividend growth has contributed significantly to shareholder returns in the past, and that is unlikely to change anytime soon.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.