8-11% Yields: Undervalued, Relatively Low-Risk Dividends For January 2024

Investing in high-quality dividend stocks is a reliable way to grow wealth over time. These stocks are often recession and technological disruption-resistant, making them enduring investment options. They are characterized by strong balance sheets, which shield them from value destruction efforts and dividend reductions during financial hardship. Additionally, these stocks tend to increase their dividends over time, countering the erosive effects of inflation and driving long-term price appreciation. They also offer an attractive current yield, reducing the necessity for the company to maintain high growth rates for an extended period to deliver satisfactory total returns.

While quality dividend ETFs like the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation Index Fund ETF (VIG) can be effective, they often generate relatively low current yields. This reliance on sustained growth over a prolonged period for total returns may not suit investors near retirement or those seeking market-beating total returns through dividend investing.

The Rock-Solid High-Yielding Standouts

#1. Enterprise Products Partners Stock (EPD): ~ 8% Yield

Enterprise Products Partners’ (EPD) business model spans the midstream energy sector, encompassing Natural Gas Liquids (NGLs), Crude Oil, Natural Gas, and Petrochemical & Refined Products Services. This diversification mitigates the risks associated with energy sector downturns, allowing EPD to capitalize on various growth opportunities. The integration of its assets – pipelines, storage facilities, and processing plants – further enhances operational efficiency and service quality. EPD’s strategic position at the Mont Belvieu NGL hub solidifies its indispensable role in the NGL market.

EPD maintains an industry-best A- credit rating supported by a well-laddered debt maturity profile, with an average term close to 20 years. The majority of its debt has fixed interest rates, ensuring balance sheet stability even in prolonged periods of high interest rates. Coupled with substantial liquidity and significant free cash flow generation, EPD enjoys considerable financial flexibility.

EPD’s consistent distribution growth over the past 25 years and a current distribution coverage ratio of 1.7 times on a distributable cash flow basis indicate the potential for continued attractive distribution growth in the years to come. Furthermore, its EV/EBITDA multiple is trading at a discount to historical averages, aligning with the near 8% distribution yield and expected 5% distribution CAGR to deliver compelling double-digit annualized total returns.

#2. Atlantica Sustainable Infrastructure Stock (AY): ~9% Yield

Atlantica Sustainable Infrastructure (AY) is a renewable power yield co. competing with industry peers such as Brookfield Renewable Partners (BEP)(BEPC) and NextEra Energy Partners (NEP). Despite lacking sponsor support akin to its rivals, AY offers a lower EV/EBITDA ratio compared to NEP and BEP and boasts a stronger balance sheet than NEP. AY’s cash flows are underpinned by long-term power purchase agreements with predominantly investment-grade counterparties, most featuring inflation-linked escalators. This makes AY a reliable choice for both inflationary and deflationary environments.

AY maintains a low corporate leverage ratio and well-laddered, self-amortizing project-level, non-recourse debt, culminating in a robust balance sheet. The company’s 9%+ yield is fully covered by stable cash flows, aligning with its long-term growth potential in renewable energy investments and demand. Notably, AY is undergoing a strategic review alongside its largest shareholder (Algonquin Power & Utilities (AQN)), potentially leading to an acquisition at a substantial premium to its current share price.

#3. Midstream Common and Preferred Equities from Both NuStar Energy (NS)(NS.PR.B) and Energy Transfer (ET)(ET.PR.I): ~8-11% Yields

NuStar Energy (NS) and Energy Transfer (ET) boast fully integrated asset portfolios with long-dated contracts mostly impervious to short-term energy price volatility. Although their growth profiles may not be robust, both companies are projected to achieve mid-single-digit EBITDA growth over the long term through tariff increases and growth investments.

Additionally, both companies have recently deleveraged balance sheets, with NS redeeming a significant portion of its highest-yielding preferreds and ET in the process of redeeming most of its preferreds. Consequently, their common and remaining preferred distributions are supported by nearly 2x distributable cash flow coverage, offering investors more appealing risk-adjusted income and total return potential.

Investor Takeaway

While dividend ETFs offer a convenient avenue for wealth compounding, diligent investors identifying high-yielding quality dividend growth stocks are often rewarded with higher current income and potentially superior long-term total returns. Building a portfolio with stocks like EPD, AY, ET, ET.PR.I, and NS.PR.B can facilitate outperformance in the market over time.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.