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If You Like Dividends, You Should Love These 2 Stocks

Dividends are only as good as the company backing them, which is why you need to dig into a business before hitting the buy button. Sometimes a fat dividend yield just isn't worth the risk because it isn't sustainable. That's not the case with industry leaders ExxonMobil (NYSE: XOM) and Enterprise Products Partners (NYSE: EPD). This pair offers up big yields, long histories of dividend increases, and solid operations. Here's why dividend investors will love these two income stocks.

A slow turn

Exxon is an integrated oil and natural gas giant with a $300 billion market cap, and it has a long history of running its diversified business in a conservative manner. The best example probably shows up on the balance sheet, where long-term debt makes up less than 10% of the capital structure. Even during the deep industry downturn of 2014-2015, when the company used debt to keep funding its capital program and dividend, long-term debt only inched up to 15% of the capital structure.

Image source: Getty Images.

This is not a company that takes big risks, but that can leave it lagging behind the industry at times. Put simply, it takes time to turn a giant ship, especially when you do so as carefully as Exxon does. And right now, Exxon is trailing behind its peers on the production front. The oil giant's average daily production fell year over year in 2016, 2017, and 2018, dropping roughly 6% over the three-year span. That's got investors worried about the future.

However, production turned higher in the second half of 2018, with continued strength in the first quarter of 2019. Most of that was driven by the company's U.S. onshore oil drilling success. It's only about halfway through its current plans on that project, and it has a few more giant projects it's working on after that, as well. That includes a broad array of offshore, liquified natural gas, and chemical and refining investments. This is all part of a well-articulated plan that will take the company through 2025.

But Wall Street has a hard time dealing with long-term anything, with most investors preferring instant gratification. That's just not going to happen with Exxon and its conservative approach. If you can think long term, though, you'll get Exxon with a yield higher than it's been in roughly 20 years. Then there's the incredible 37-year history of annual dividend increases, which no peer can match. Add in the rock-solid balance sheet and the clear progress on the company's growth plans, and Exxon is easily a stock that a dividend investor could start to love.

Building a cushion

Enterprise Products Partners is one of the largest midstream limited partnerships in North America. It helps move and process oil and natural gas using a largely fee-based model that helps protect it from the volatile commodity swings in the energy industry. The bigger driver of performance is demand for its services. That demand is expected to remain strong as U.S. energy production has outstripped the capacity to move and process these key fuels. That suggests Enterprise and its midstream peers have a long runway for growth.

EPD Dividend Per Share (Annual) data by YCharts

The problem with Enterprise is that it has decided to shift its business model a little bit. Historically, it has funded growth by issuing debt and units. However, it wants to use cash flow to fund a larger portion of its growth so it can limit the dilutive impact of unit sales. That's meant slowing distribution growth into the low single digits for a few years. The basic idea is to let free cash flow grow so it can be put to work on capital projects. Once this overhaul is complete in a year or two, distribution growth is likely to pick back up to the mid-single digits. Note that it's making this transition without killing its impressive 22-year streak of annual distribution increases -- a testament to its unitholder commitment.

The big story here, however, is that Enterprise is making very good progress. For example, it covered its distribution by an incredible 1.6 times in 2018. (For reference, 1.2 is considered strong coverage.) And it hasn't pulled back on the capital investment front, with roughly $5 billion worth of projects underway. Leverage is toward the low end of the industry as well, so there's little balance-sheet risk here to worry about. Now add in a robust 6% distribution yield, and you can see why Enterprise deserves a little love as it works to become even stronger than it was before.

Not perfect, but...

No investment is worry-free, and that's definitely true of Exxon and Enterprise. They are each working through important transition points. However, they are financially strong, have well laid-out plans and goals, and are showing strong progress. Add in long histories of rewarding investors with disbursement increases and big yields, and you can see that this pair is worth a closer look today. You'll need to take a long-term view of the situation, but you'll be able to collect fat yields while you watch these financially strong industry giants execute on their plans for a better future.

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Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.


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