Which Energy Company Is the Best Dividend Stock?

By Markets Fool.com

Image source: Getty Images.

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A dream stock for any dividend seeker would meet three criteria. It would pay a generous current dividend, which it supports with strong financials, and has clear visibility to increase the payout in the future. While several energy stocks meet some, or all, of this criteria, the best of the bunch is Canadian energy infrastructure giant Enbridge (NYSE: ENB). Here's why.

An above average yield

As the following chart shows, Enbridge's current dividend rate is solidcompared to others in the energy sector, and well above the market's average:

Dividend Payer

Current Yield

Energy Transfer Equity (NYSE: ETE)

6.59%

Enterprise Products Partners (NYSE: EPD)

6.29%

Occidental Petroleum (NYSE: OXY)

4.36%

Chevron (NYSE: CVX)

3.89%

TransCanada (NYSE: TRP)

3.70%

Enbridge

3.68%

ExxonMobil (NYSE: XOM)

3.44%

Williams Companies (NYSE: WMB)

2.66%

Kinder Morgan (NYSE: KMI)

2.29%

S&P 500

2.08%

Data source: Yahoo! Finance.

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While its current yield is not as high as some other energy stocks, especially MLPs like Enterprise Products Partners, that is by design. For perspective, Enterprise Products Partners typically pays out roughly two-thirds of its cash flow to investors while Enbridge only pays out about half of its annual cash flow. That decision to retain a substantial portion of cash flow is one reason why Enbridge has not only maintained its payout during the oil market downturn but increased it. Contrast this with Williams Companies and Kinder Morgan, which both had to significantly reduce their payouts because they had been paying out nearly every dollar they brought in.

Rock solid financials

Another reason why Enbridge has been able to maintain its payout is due to its strong underlying financials. Currently, 96% of the company's cash flow comes from take-or-pay or similar contracts, while less than 5% of its cash flow has any volume or commodity price risk, which leads to very stable cash flow. Contrast this with Kinder Morgan, for example, which gets 91% of its income from fee-based sources, though only 67% is from take-or-pay contracts, while 9% has direct commodity price exposure. That contract situation caused a bit more volatility in Kinder Morgan's cash flow during the downturn. Meanwhile, commodity price exposure is par for the course at oil giants like Exxon, which creates significant volatility in cash flow.

Another pillar of strength at Enbridge is its balance sheet, evidenced by a strong investment-grade credit rating of Baa2/BBB/BBB+. Contrast that rating with Williams Companies, which at Ba2/BB has junk-rated credit while Kinder Morgan's Baa3/BBB- rating is at the bottom rung of investment grade. Those weaker credit ratings are another reason why both companies had to cut their dividends during the downturn and divert some of that cash to bolster their balance sheets.

An excellent growth profile

Enbridge's robust current yield and solid underlying financials make it a good income stock for today. However, what really sets it apart is its growth potential, which will turn it into an outstanding dividend stock in the future. As the following chart shows, the company boasts unrivaled dividend growth, supported by a gargantuan project backlog:

Company

Dividend Growth Forecast

Recent Growth History

Supporting Future Growth

Energy Transfer Equity

Undetermined

Held the payout flat for the past five quarters

$15 billion project backlog at its MLP subsidiaries

Enterprise Products Partners

Plans to grow the payout by 5.2% in 2016

58 consecutive quarterly distribution increases

$5.6 billion project backlog

Occidental Petroleum

Undetermined

14 consecutive annual increases

Higher oil prices and 5% to 8% annual production growth

Chevron

Undetermined

29 consecutive annual increases

Higher oil prices and up to 4% annual production growth through 2020.

TransCanada

8% to 10% compound annual growth through 2020

7% compound annual growth since 2000

$20 billion growth project backlog

Enbridge

10% to 12% compound annual growth through 2024

21 consecutive annual increases averaging 10.6%

$20 billion of projects under development and another $37 billion on the horizon

ExxonMobil

Undetermined

34 consecutive annual increases

Higher oil prices and the completion of 16 major projects over the next three years

Williams Companies

Unlikely to resume dividend growth until 2018

Slashed the payout 69% in August

$5 billion growth project backlog

Kinder Morgan

Undetermined: However, analysts believe it has the potential to double the payout by 2018

Slashed the payout 75% last December

$13 billion growth project backlog

Data sources: Company press releases and investors presentations.

Most energy companies do not have much, if any, visibility on future dividend increases due to the oil market downturn or internal financial problems. Not so with Enbridge, which firmly believes it can deliver low double-digit dividend growth for nearly a decade. That is not just a stretch goal but supported by the fact that Enbridge has an industry-leading backlog of fee-based projects in development along with an enormous supply of potential projects lined up to drive growth early next decade.

Investor takeaway

Enbridge might not have the highest yield in the sector at the moment, but it has one of the best overall payouts thanks to its secure cash flow, relatively low payout ratio, and strong balance sheet. Further, what takes it to the next level is its growth potential, which is simply unrivaled in the sector. These factors combine to make Enbridge the best energy dividend stock to buy right now.

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Matt DiLallo owns shares of Enterprise Products Partners and Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron and Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.