JamesBrey
With interest rates at elevated levels and inflation remaining stubbornly high, income-focused investors are becoming increasingly selective, preferring stocks that offer a yield with a comfortable spread above the current risk-free rate. This compensates for the additional risk associated with investing in equities. Additionally, investors seek high-yield stocks whose payouts not only keep pace with but ideally exceed the elevated rate of inflation to preserve their purchasing power over the long term.
Fortunately, there are several stocks that meet these criteria. In this article, we will discuss three stocks yielding between 7% and 8%, which are very likely to continue growing their payouts at a rate that meets or exceeds inflation for many years to come.
#1. Enterprise Products Partners L.P. (EPD)
EPD is arguably the best high-yield stock for risk-averse investors. It has a well-diversified portfolio of strategically located midstream infrastructure assets that earn a wide moat rating from Morningstar and high respect from many in the market. The company has a consistent track record of delivering 10%+ returns on invested capital across various energy and macroeconomic environments. Over the long term, the stock has delivered market-beating total returns, growing its distribution payout every year for the last quarter-century, despite many peers in the midstream sector having to slash their distributions during that time.
Moreover, its balance sheet is the best in the industry with a very low 3x leverage ratio and significant liquidity, as well as a weighted average term to maturity on its debt of nearly two decades, earning an A- credit rating, which is the best in the midstream sector.
Enterprise Products Partners also has a substantial growth backlog coming online in the coming years that will deliver robust EBITDA growth, thereby reducing its leverage ratio even further. This will free up management to potentially accelerate its return of capital to unit holders through strong distribution growth and possibly massive buybacks. Alternatively, management could use this extra capacity to make a major acquisition, which would further strengthen the business by diversifying and enhancing its competitive positioning on a DCF per-unit basis.
Combining all this with the fact that it has been growing its distribution at a 5% CAGR over the last several years, and with its 1.7 times distributable cash flow coverage ratio of its current distribution, Enterprise Products Partners appears highly likely to continue growing its distribution at a rate that exceeds inflation for many years to come. All combined, with its current 7% distribution yield and very low-risk profile, Enterprise Products Partners looks like a great pick for an income-focused retiree.
#2. Enbridge Inc. (ENB)
ENB offers many of the same strengths as Enterprise Products Partners but with a slightly different twist. Unlike most peers, Enbridge issues a 1099 tax form, making it more suitable for people to hold in their retirement accounts, or for those who do not want to deal with K-1 forms, particularly non-U.S. investors.
Enbridge also offers significant regulated exposure in its asset base, contrasting with Enterprise Products Partners’ and Energy Transfer’s almost entirely contracted cash flow profile. This provides arguably even greater safety and stability, especially given that nearly all of Enbridge’s counterparties are investment grade. Enbridge is also investing in a renewable power production portfolio, which, when combined with its regulated utilities and contracted pipeline assets, makes it a well-diversified energy company.
Beyond that, Enbridge currently offers a 7.4% dividend yield, has grown its dividend for over a quarter-century, and has achieved market-crushing long-term total returns. It holds a BBB+ credit rating, and while its leverage ratio is higher than that of Enterprise Products Partners, it can handle this higher leverage due to its greater regulated exposure. Its debt is also fixed-rate and termed out for decades into the future, positioning it well to weather interest rate headwinds in a higher-for-longer environment. The company covers its distribution at roughly 1.5 times its distributable cash flow coverage ratio and plans to continue growing its dividend by 3% to 5%, which is likely to meet or exceed inflation rates.
#3. Energy Transfer LP (ET)
ET presents a slightly higher risk and higher return opportunity compared to the other two options in this article. It is a well-diversified, highly contracted midstream company that generates robust cash flows through all energy and economic environments. Its balance sheet has recently been significantly deleveraged, now holding a BBB credit rating from S&P. With an 8% distribution yield, it offers the highest current yield of the three stocks discussed and covers it at nearly two times distributable cash flow, with expected growth in its distribution at a 3% to 5% CAGR which will likely meet or exceed the rate of inflation for years to come.
Like the other two stocks, Energy Transfer has an impressive growth pipeline and a track record of making accretive acquisitions that also keep its leverage ratio in check. While some may be cautious about Energy Transfer due to the aggressive growth strategies historically associated with its founder and executive chairman, Kelcy Warren, the new co-CEOs have done a commendable job of deleveraging the balance sheet and growing the distribution lately. We expect them to lean slightly more aggressively on the growth side than some peers. However, this should enable the company to continue delivering inflation-beating distribution growth for many years to come, and eventually, we also see the buyback program increasing.
Investor Takeaway
With Enterprise Products Partners, Enbridge, and Energy Transfer, investors can enjoy an income yield between 7% and 8%, comfortably beating the current risk-free rate by several hundred basis points, while also seeing that payout grow at a rate that outpaces inflation for years to come. Meanwhile, the underlying business models and balance sheets are built to weather all kinds of macroeconomic environments, which should help investors sleep well at night. In a world of growing uncertainty and interest rate volatility, these three stocks can serve as a solid core pillar for any income-focused portfolio that needs to achieve both a high yield and a solid growth rate.
