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

2024-01-18 07:15:00 ET

Summary

• There are a surprising number of high yield, relatively low-risk dividend growth stocks available right now.
• We share our filter to ensure that we are finding quality dividend stocks.
• We also share some of our favorite picks of the moment.

Buying high-quality dividend stocks is a great way to compound wealth over the long term. This is because they are typically:

1. Recession and technological disruption-resistant, and therefore can stand the test of time.
2. They have strong balance sheets that prevent them from having to destroy shareholder value and/or slash their dividends in an attempt to stave off financial distress.
3. They grow their dividends over time, offsetting inflationary headwinds and driving natural long-term price appreciation.
4. They provide an attractive current yield, reducing the need for the company to sustain high growth rates over a prolonged period of time in order to deliver satisfactory total returns.

While investing in quality dividend ETFs like the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation Index Fund ETF (VIG) is a simple and effective way to approach this, the downside to both of these funds is that they generate fairly low current yields. As a result, total returns are almost entirely dependent on sustained growth over a prolonged period of time, which can be problematic for investors who are either:

(1) Near retirement.

(2) Wanting to generate market-beating total returns over the long term while still implementing a dividend investing methodology.

The good news is that there are plenty of individual quality dividend stocks available right now that offer very high - yet safe and growing - dividends. In this article, we will look at three of them:

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

EPD's business model spans the midstream energy sector (AMLP), including Natural Gas Liquids (NGLs), Crude Oil, Natural Gas, and Petrochemical & Refined Products Services, thereby mitigating much of the risk inherent in energy sector downturns while also allowing EPD to capitalize on multiple growth avenues. The integration of its assets-pipelines, storage facilities, and processing plants-further enhances its operational efficiency and service quality. Moreover, EPD's strategic position at the Mont Belvieu NGL hub solidifies its critical role in the NGL market.

EPD's industry-best A- credit rating is underpinned by a very well-laddered debt maturity profile, with an average term close to 20 years and a large portion of its debt not due for over 30 years. The vast majority of its debt has fixed interest rates, providing stability for the balance sheet in a scenario of prolonged high interest rates. When combined with $4 billion in liquidity and significant free cash flow generation, EPD has considerable financial flexibility.

Another reason we really like EPD right now is due to its history of consistent distribution growth over the past 25 years. Moreover, the current distribution coverage ratio of 1.7 times on a distributable cash flow basis implies that the distribution is poised to continue growing at an attractive pace for years to come.

Finally, its EV/EBITDA multiple is trading at a discount to its historical averages and should combine with its near 8% distribution yield and expected 5% distribution CAGR to deliver attractive double-digit annualized total returns for years to come.

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

AY is a renewable power yield co. that is peers with Brookfield Renewable Partners ( BEP )( BEPC ) and NextEra Energy Partners ( NEP ). While it lacks the backing of strong sponsors like these two aforementioned rivals enjoy via Brookfield ( BN )( BAM ) and NextEra Energy ( NEE ), AY is cheaper than both NEP and BEP on an EV/EBITDA basis and has a stronger balance sheet than NEP. Moreover, its cash flows are backed by long-term power purchase agreements with almost entirely investment-grade counterparties and they also mostly have inflation-linked escalators on them, making AY a solid bet for either an inflationary or deflationary environment.

Moreover, its corporate leverage ratio is quite low and its debt is well-laddered, as the vast majority of its debt is self-amortizing project-level, non-recourse debt, resulting in a very solid balance sheet.

Last, but not least, its 9%+ yield is fully covered by stable cash flows, it enjoys strong long-term growth potential via the boom in renewable energy investment and demand, and is also currently undergoing a strategic review alongside its largest shareholder (Algonquin Power & Utilities ( AQN )) that could potentially lead to it getting bought out at a meaningful 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

Both ET and NS boast fully integrated asset portfolios that have long-dated contracts that are mostly immune to short-term volatility in energy prices. While their growth profiles are not robust, both businesses should be able to grow EBITDA at a mid-single-digit CAGR over the long term through a combination of tariff increases and growth investments.

Moreover, both have freshly deleveraged balance sheets and NS recently redeemed a large chunk of its highest-yielding preferreds while ET is in the process of redeeming most of its preferreds as well. This means that their common and remaining preferreds have safer than ever distributions that also happen to be covered by nearly 2x with distributable cash flow.

As a result, we think that both the common and preferred distributions from both of these partnerships offer investors much more attractive risk-adjusted income and total return potential than what BTI is currently offering investors.

Investor Takeaway

While dividend ETFs are a nice one-stop shop for investors looking to compound wealth over the long term, investors who are willing to put in the extra work to identify high-yielding quality dividend growth stocks are often richly rewarded with a combination of higher current income and potentially higher total returns over the long-term. That is why I have been building my portfolio with dozens of stocks like EPD, AY, ET, ET.PR.I, and NS.PR.B that have enabled me to outperform the market over time.

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