Dividend stocks tend to deliver steady growth with relatively low volatility. Sometimes, however, the best dividend stocks can lose value even though their underlying businesses are performing well. These declines are usually buying opportunities because they increase their dividend yields.
Water stocks are three dividend stocks that currently stand out to our contributors as incredible bargains American Waterworks (NYSE: AWK) and Managed Partnerships (MLPs) Crestwood Equity Partners (NYSE: CEQP) and Business Product Partners (NYSE: EPD).
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The other side of the coin
Reuben Gregg Brewer (Enterprise Products Partners): Investors are worried, from a big perspective, that the pressure on clean energy will diminish older habit in the carbon energy space, such as the midstream giant Enterprise Products Partners. This is not unreasonable given the shifting winds in Washington. But 7.8% returns Enterprise is in a fairly strong position, even though there are lean times ahead of the broader energy industry.
With a market capitalization of $ 50 billion, this limited partnership is one of the largest midstream players in North America. The company owns a widely diversified portfolio of largely fee-based assets that generate constant cash flow to support its distribution. To put a number on it, it covered its spread 1.6 times in the 2020 pandemic hit (1.2 times was historically considered strong coverage). Meanwhile, he has a very low leverage ratio compared to peers, so the balance sheet is also rock solid. If we look at growth, it has $ 2.4 billion in capital investment projects set up in 2021 and 2022 to raise the top and bottom line higher.
EPD Dividend Yield Data by YCharts
That said, the long-term demand for new projects may decrease as clean energy becomes more prominent. But even in that scenario, Enterprise can use its size, diversification and solid finances to buy smaller competitors. So, with the dividend yield still close to the top of Enterprise’s historic yield spectrum, long-term investors should dive deep, while Wall Street is still trying to figure out what the future holds for this well-positioned midstream name.
A valuation at the bottom of the barrel
Matt DiLallo (Crestwood Equity Partners): The units of Crestwood Equity Partners have fallen by more than 15% since the beginning of 2020 MLP increased its earnings by 10% last year despite a challenge oil market. The company expects to generate at least the same revenue this year, with an upward potential as volumes improve due to higher oil prices. It is on track to generate enough cash to cover its 9.7% payout and its growth capital program. The excess cash will increase its financial flexibility, and reduce the leverage ratio to its target band.
Assuming Crestwood reaches the center of its 2021 lead, it trades 7.5 times its earnings and 5.4 times cash flow. Meanwhile, it is even cheaper with 7.1 times earnings and five times cash flow at the top of its forecast. The company said a higher finish is increasingly feasible in a long range of $ 55 to $ 60 oil, which seems likely, as crude oil is currently above $ 65 a barrel. These are dirty cheap levels for a company that generates very reasonably stable cash flow. It is on track to produce enough cash by 2021 to cover its high-yield dividend twice. Therefore, it has a lot of financial flexibility to finance growth projects, make acquisitions and repay debt. The combination of a low valuation, an ultra-high return and an improving balance sheet makes Crestwood look like an opportunity that investors who do not focus on income want to overlook.
The dividend growth that no one is looking at
Neha Chamaria (American Waterworks): The U.S. Waterworks share has fallen nearly 17% in the past month, but I see absolutely no logic behind the decline, given the company’s undoubtedly strong principles. On the contrary, American Water last month delivered good figures for 2020 and an extremely encouraging long-term outlook, making it a compelling dividend stock to consider buying while still cheap.
American Water is in fact one of the most underrated dividend stocks out there. Keep in mind that every year since its publication in 2008, the company has increased dividends and given shareholders a 10% increase in 2020. The dividend increases are going nowhere: management is aiming for annual dividend increases at the highest point of 7 to 10% between 2021 and 2025, supported by a similar growth in earnings per share.
There is little reason to believe that American Water will not achieve its financial goals. As the largest public and listed water and wastewater consumption in the US, it has an excellent impact in a regulated, essential services industry that is fairly isolated from economic upheavals. Although it ensures a steady flow of revenue and cash flow, the company is constantly investing in infrastructure to get timely approvals for tariff increases to grow its top line. For example, he expects the rate base to grow by 7% to 10% by 2025.
While American Water’s 1.6% dividend yield may not be attracting, the stock’s dividend growth has contributed significantly to shareholder returns in the past, and is unlikely to change any time soon.
This article represents the opinion of the author, who may not be in agreement with the ‘official’ recommendation position of a Motley Fool premium advisory service. We are furry! Questioning an investment thesis – even one of our own – helps us all to think critically about investments and to make decisions that help us become smarter, happier and richer.