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3 Top Stocks for Dividend Investors

In the past few years, oil and gas stocks have fallen out of favor with investors. Stock prices are under pressure, pushing their yields to extremely attractive levels. Three midstream stocks offering alluring yields are Williams Companies (NYSE: WMB), Enterprise Products Partners (NYSE: EPD), and Enbridge (NYSE: ENB). Importantly, all the three stocks' dividends are well supported by cash from operations. Let's take a look at these three companies and why dividend investors should consider adding them to their portfolios.

Williams Companies: Resilient performance in difficult times

While most other energy companies struggled during the second quarter, Williams Companies' performance stood out. The company's cash from operations for the quarter increased 7% over the year-ago quarter while its adjusted EBITDA was flat year over year. A couple of key factors contributed to Williams Companies' strong performance in a challenging market. First, its regulated gas pipelines, which serve utilities, power plants, and LNG facilities, help it generate stable revenue.

Image source: Getty Images.

Second, Williams Companies' gas-gathering operations are located in premium basins including in the Marcellus and Utica shale regions. Williams' customers for this business segment are producers with low-cost supplies, which allowed Williams to increase its gas-gathering volumes by an impressive 3.6% over the year-ago quarter. What makes this remarkable is the fact that Williams' gathering volumes increased when the Lower 48 gas production fell by 0.3% year over year.

Finally, despite depressed gas prices, a steady demand helped Williams Companies' performance during the quarter. The company's fee-based contracts allow it to generate stable cash flows irrespective of short-term commodity price fluctuations.

Overall, strategically located assets and stable cash flows from fee-based contracts place Williams Companies on solid footing for volatile times like these. With a dividend coverage of 1.7 times, the company's dividends definitely look safe, making its 7.8% yield extremely attractive.

EPD Dividend Yield data by YCharts

Enterprise Products Partners: A industry bellwether

Enterprise Products Partners' performance was robust even in one of the most challenging quarters. The company's petrochemicals segment was the worst hit in the second quarter, largely due to low refinery utilization rates in the U.S. resulting in lower feedstock availability and reduced international demand for petrochemicals. Since then, refinery utilization rates have improved to around 80% from less than 70% in Q2. So the company is witnessing improved activity in this segment in the third quarter.

In addition to improving operations, Enterprise Products Partners is changing its future plans to accommodate the evolving in the oil and gas market. It has reduced its 2020 planned capital spending to $2.8 billion in response to the lower demand for oil and gas products due to the coronavirus pandemic. Recently, Enterprise called off its Midland-to-ECHO 4 crude oil pipeline project, which will save it $800 million in capital expenditures over three years. Instead, the company will use existing pipelines for its supply agreements on the Midland-to-ECHO 4 project. This became possible as Enterprise Products amended some agreements with its existing customers by reducing near-term volume commitments in exchange for extending the term of agreements. This is an example of judicious capital allocation in challenging times.

Overall, Enterprise Products Partners easily provides all that any income investor looks for in an investment. The MLP has a conservative balance sheet, a strong distribution coverage of 1.6 times, diversified midstream operations, and largely stable fee-based cash flows.

Enbridge: The Canadian midstream giant

Canadian energy giant Enbridge's integrated pipeline network, diversified sources of cash flow, regulated gas distribution operations, and financial strength helped it perform quite well in a difficult quarter. The company's core refining markets, in the Midwest and Gulf Coast, are recovering faster compared to other parts of the U.S. This has aided in the company's delivery volumes bouncing back in this down market.

Similarly, volumes on Enbridge's key Mainline system are recovering. The company expects throughput on the pipeline to recover nearly to pre-COVID levels by the end of 2020. All this gives Enbridge the confidence to still achieve its previously stated distributable cash flow guidance between $4.50 Canadian dollars and CA$4.80 per share for 2020.

What's more, Enbridge expects its performance to remain robust over the coming years, thanks to its already secured growth projects worth CA$11 billion that are expected to come into service over the next three years.

Enbridge paid 67% of its second-quarter distributable cash flow (DCF) per share as dividends, retaining the remaining amount for future growth. That means, like Williams Companies and Enterprise Products Partners, Enbridge generated more DCF than it paid in dividends. The company targets a payout ratio below 65% of its DCF, which is quite conservative. All the above, combined with 25 years of consistent dividend growth, makes Enbridge a dream stock for income investors.

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Rekha Khandelwal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.


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