The S&P 500 has enjoyed a nearly unrelenting rally over the past year. It’s up nearly 10% in 2024 and has surged almost 24% over the past 12 months. That has the broad-market index routinely setting new all-time highs.
The S&P 500’s rally also has it trading at a high-valuation multiple (more than 20 times its price-to-earnings (P/E) ratio) and low-dividend yield (around 1.3%), making it harder to find values and compelling income streams.
However, there are still some attractive high-yield buys even as the market hits new highs. Enbridge (NYSE: ENB), Williams (NYSE: WMB), and Enterprise Products Partners (NYSE: EPD) stand out to a few Fool.com contributors for their enticing income streams.
Enbridge is built to pay reliable dividends
Reuben Gregg Brewer (Enbridge): Using a toll-taker business model, Enbridge owns a massive portfolio of oil pipelines, natural gas pipelines, regulated natural gas utilities, and clean energy assets. All of these businesses generate reliable cash flows from either fees, contracts, or government-regulated charges. So the company is not only diversified but has ample cash flow to cover its hefty 7.4% dividend yield.
But the real proof is in the numbers. For example, Enbridge has increased its dividend every year for 29 consecutive years. The distribution is roughly in the middle of management’s distributable cash-flow payout ratio target range of 60% to 70%. And the company’s balance sheet is investment-grade rated. The foundation here is rock-solid.
But there is one problem. Enbridge’s yield is likely to make up the lion’s share of the return here. Through 2026, the company is projecting distributable cash-flow growth of just 3%, which means dividend growth will be about that rate, too. After 2026, growth is projected to pick up to 5%, which is better than the historical growth rate of inflation but still not exactly huge.
That makes Enbridge most appropriate for investors looking to maximize the income they generate from their portfolios. But given the mix of yield, business model, and financial strength, that will probably still be enticing to a lot of dividend investors, given that the yield on the S&P 500 Index is a miserly 1.3% or so.
Still really cheap despite its rally
Matt DiLallo (Williams): Natural gas pipeline giant Williams has rallied 40% over the past year. However, the company still trades at an attractive valuation compared to the S&P 500.
The gas-infrastructure giant expects to generate about $4.13 per share in cash flow this year at the mid-point of its guidance range. With its share price recently around $40, Williams trades at less than 10 times forward earnings. That’s much cheaper than the S&P 500, which has a forward P/E ratio above 20.
Williams’ low valuation is why it has a high dividend yield, over 4.5% compared to the roughly 1.3% dividend yield of the S&P 500. The pipeline company generates plenty of cash to cover that high-yielding payout (2.2 times the dividend-coverage ratio in 2024).
The company has grown its payout at a 6% compound annual rate since 2018, including 6.1% earlier this year. Williams is targeting 5% to 7% dividend growth in the future.
Powering the payout will be a combination of its financial strength, organic expansion projects, and acquisitions. Williams has a long list of capital projects under construction that provide visibility into its earnings growth through 2027. The company routinely supplements organic growth with accretive acquisitions. For example, it closed its nearly $2 billion acquisition of a major natural gas storage portfolio earlier this year. That deal will supply it with incremental income and expansion upside. The company anticipates that organic expansions and acquisitions will help fuel 5% to 7% annual-earnings growth over the long term.
Williams offers investors income and growth for a value price. Because of that, it could continue delivering strong total returns in the future.
A model of consistency
Neha Chamaria (Enterprise Products Partners): Enterprise Products Partners stock’s forward-dividend yield of 7.3% is one of the highest among large-cap energy stocks today. What matters, though, is the reliability of this oil and gas stock’s dividends: Enterprise Products has a rock-solid dividend history and is consistently churning out big cash flows to support its dividend payout and high-dividend yield.
Enterprise Products remained undeterred even during the toughest of times, including the financial crisis of 2008 to 2009 and the oil price collapse of 2014 to 2016, and continued to increase its annual-dividend payout every year. The midstream energy infrastructure giant has now increased its dividend payout for 25 consecutive years.
On the one hand, Enterprise Products generates steady and predictable cash flows under long-term, fee-based contracts for providing services like storage and transportation of natural gas, natural gas liquids, crude oil, refined products, and petrochemicals.
On the other hand, the company consistently invests in infrastructure to boost cash flows while keeping debt at manageable levels, such that it has the flexibility to return capital to shareholders regardless of where the economy is. In 2023, for example, Enterprise Products’ distributable cash flow (DCF) could comfortably cover its dividends by 1.7 times. The company has, in fact, consistently maintained DCF coverage above 1.5 times since 2018.
With projects worth $6.9 billion under construction, Enterprise Products should be able to unlock newer sources of cash flows over the next couple of years or so, making it one high-yield stock you can buy now and hold for the long term.
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Matt DiLallo has positions in Enbridge and Enterprise Products Partners. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
The S&P 500 Is at All-Time Highs, and These 3 Stocks Are Still High-Yield Buys was originally published by The Motley Fool
