Dividend investors looking for solid total returns in 2015 should turn to beaten-down energy stocks. With bonds yielding practically nothing and most other traditional sectors for dividend investing looking pricey, high-yielding energy stocks are your best income bet in the new year.
Never discount the importance of dividend investing to your total returns. After two solid years of market returns in 2013 and 2014, it’s easy to take dividends for granted. But in years where the market is flattish or down, the dividend may be the only return you see at all.
After six years of nearly uninterrupted bull market conditions, U.S. stocks are priced to deliver some pretty uninspiring returns going forward. At the risk of sounded alarmist, the Shiller P/E (i.e. the 10-year cyclically-adjusted P/E ratio, or (NYSE:CAPE)” is currently at the levels we saw before the 1929 crash and the 2008 meltdown.
Now, I’m not a doom-and-gloomer, and I’m not forecasting an imminent crash. But realistically, we’re looking at pretty measly returns going forward. Assuming a reversion to the long-term average, we’re looking at future returns of about 0.1% per year going forward. At these levels, dividend investing may be more important now than at any time in the past 30 years.
As we enter a new year, it’s time to evaluate dividend investing sector options. 2014 was definitely the year of the REIT, as I suggested it would be this time last year. At the end of last year, I noted that conservative equity REITs were on sale, offering fantastic yields in what I expected to be a continued low-rate environment. The mid-2013 “taper tantrum” had thoroughly thrashed the REIT sector, leaving some fantastic bargains.
Well, REITs are no longer the bargain they once were. As a sector, they are poised to finish 2014 up almost 30%. Meanwhile, many solid energy stocks are down 20% or more from their recent highs. If you believe that energy stock dividends are safe—and let me emphasize that I do—then energy stocks are the dividend investing pick for 2015. Here are some of my favorites.
Enterprise Products Partners
I first mentioned Enterprise Products Partners (NYSE:EPD) in 3 Dividend Stocks to Buy After the Oil Price Collapse and I would reiterate that recommendation here.
Even after its recent rebound, Enterprise Products is down a good 11% from its summer highs, which is – for lack of better word — absurd. This is a midstream pipeline operator that gets 85% of its gross operating market from fee-based contracts and has no significant exposure to energy prices.
Enterprise Products sports a distribution coverage ratio of 1.6 times, meaning its distribution is safe and has plenty of room for growth. And grow it has; Enterprise Products has raised its dividend for 40 consecutive quarters.
Enterprise Products currently sports a yield of 3.9%, which is high but not exceptional. But if you had bought Enterprise Products five years ago and held it until today, you’d be enjoying a yield on cost of 5.3%. Had you bought it 10 years ago, you’d be enjoying a yield on cost of 7.2%. That’s not too shabby.
Enterprise Products isn’t quite the bargain dividend stock it was three years ago. But it’s still a good bargain in a low-yield environment.
Williams Companies
Next up is fellow MLP Williams Companies (NYSE:WMB). Williams isn’t an MLP, per se, but rather an MLP general partner. Essentially, Williams Companies operates the assets of Williams Partners (NYSE:WPZ) and newly acquired Access Midstream (NYSE:ACMP) and takes a large cut of the distributions for its efforts.
Williams currently sports a dividend yield of 5.0%, which is impressive on its own. But Williams has also been a dividend raising monster over its life. If you had bought Williams five years ago and held it until today, you’d be enjoying a yield on cost of 22.7%. Had you bought it 10 years ago, you’d be enjoying a yield on cost of 53.6%. That’s not a misprint. Williams has compounded its dividend at a 28.7% annualized rate for the past 10 years.
Williams is not purely a fee-based pipeline operator and has a degree of commodity price risk. If energy prices stay depressed for long, the growth rate of Williams’ dividend might slow a little. At current yields, I’m ok with that. Williams’ dividend payout ratio is just 66%, indicating very little risk of a pending dividend cut.
BP
Finally, we come to a stock that has been something of a pariah for years: BP plc. Investors never fully forgave BP for the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Four years later, and BP’s share price is still over 33% lower than its pre-spill high.
2014 was really an annus horribilis for BP. Following the Crimea invasion and prolonged standoff between the West and Russia, BP’s 20% ownership of Russian energy giant Rosneft has hung around its neck like an albatross. And if that wasn’t enough, BP was taken down along with the rest of the Big Oil majors during the massive slide in the price of crude oil.
Yet BP is now fantastically cheap, trading for just 12 times expected 2015 earnings. It also yields a good 6.1%. Historical dividend comparisons aren’t particularly useful here, as BP has only recently reinstated its dividend after cutting it following the Deepwater Horizon disaster. But a 6.1% yield, even in the absence of rapid dividend growth, is nothing to take lightly.
Disclosure: Long BP, EPD. WMB