Dividend stocks yielding more than 3% are coveted among income investors. Why? Well, for starters, that easily beats the current 1.8% yield of the S&P 500. And although higher yields are often a hallmark of higher risk, there's a sweet spot of dividend stocks yielding between about 2% and 5% that are among the most stable and mature businesses you can invest in.
If above-average dividend yields and stable payouts sound good to you, then you should consider taking a closer look at French energy giant Total SA (NYSE: TOT), North American pipeline leader Kinder Morgan (NYSE: KMI), and dividend champion ONEOK (NYSE: OKE). Here's why they're three dividend stocks to buy right now.
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A forward-thinking oil supermajor
Total is one of the largest producers of crude oil and natural gas in the world, but it's definitely tuned in to the possibility that fossil fuel consumption may soon peak. Coal is expected to be among the first casualties thanks to shifting demands in global electricity markets, while almost every supermajor concedes that crude oil consumption could peak in the next decade or two as electric vehicles encroach on the turf of the internal combustion engine. Natural gas may prove stickier, but also figures to play a central role in meeting climate goals.
The company is preparing by building profitable renewable energy companies (solar energy, energy storage, and the like) and investing generously in technologies that require more long-term thinking (next-gen biotech platforms for creating jet fuel).
Total is also betting big on the largest opportunity in natural gas: the quickly growing global market for liquefied natural gas (LNG). The company will be the second-largest LNG trader in the world by 2020. That alone is expected to generate $3 billion in operating cash flow per year.
Of course, while focusing on the future should be important for investors, it's not as if Total wields a lackluster portfolio in more traditional energy markets -- by far its bread and butter now and for years to come. Good stewardship of shareholder capital and a focus on safe and efficient operations over the years resulted in a solid 2017. It generated copious amounts of cash, sported the lowest debt-to-capital ratio of the supermajors, and pledged to increase its dividend 10% by 2020 while repurchasing $5 billion in shares.
Considering the current dividend yield is 5.1%, investors could feel almost spoiled over the next three years if dividends rise further.
High expectations for 2018
Kinder Morgan is a large and mature business, but the stock hasn't exactly been a poster child of stability in recent years. That's because the company's structure dictates that it maintain a relatively high level of debt, which got it into trouble when energy prices collapsed a few years ago. The fee-based business has proved resilient, although management was forced to redirect cash flow from the dividend to debt repayments.
In 2018, investors are looking to reap the rewards from difficult decisions made in the last three years. Compared to 2017, Kinder Morgan is increasing its per-share dividend 60% this year and 150% by 2020. In other words, the 3.2% yield is about to grow substantially, which makes it an attractive energy stock and dividend stock.
The massive dividend increase should be sustainable, too. Kinder Morgan is expecting to generate an additional $1.6 billion in earnings from growth projects coming online in the near future. Considering the company is the largest pipeline operator in North America -- which is nearing energy independence -- fee-based businesses that serve as the conduit for major energy producing and exporting regions figure to be pretty solid investments for investors over the long term.
Dividend growth for years to come
ONEOK is another pipeline company, but one that has taken a slightly different route than Kinder Morgan in recent years. It merged with its former MLP to save money, maintains a relatively high coverage ratio, and still manages to pay out a 5.2% dividend yield. While that's pretty impressive, management has plans to increase the payout 9% to 11% annually through 2021 while maintaining a coverage ratio of at least 1.2.
ONEOK has multiple expansion projects coming online by early 2020 that bode well for its ability to deliver on its targets. Meanwhile, management seems to be considering the potential to expand on or around those projects beyond 2021, which could come at a more capital-efficient price tag than greenfield construction -- something that could greatly benefit shareholders.
So, although ONEOK has an aggressive plan in place to grow the business, increase the dividend, and continue deleveraging the balance sheet, it looks as if management is poised to deliver on its lofty goals.
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