Famed oilman John D. Rockefeller once remarked to a neighbor that the only thing that gave him pleasure was to see his dividend checks coming in. While that might have been a bit dramatic, there is a certain satisfaction the comes from earning passive income. If nothing else, it can provide you with the free time and the money to do the things you enjoy the most, which is why it makes sense to seek out ways to generate passive income.
While there are plenty of options out there, one of the easier ones is buying higher-yielding dividend-paying stocks. Three worth considering are Enterprise Products Partners (NYSE: EPD), CorEnergy Infrastructure Trust (NYSE: CORR), and TerraForm Power (NASDAQ: TERP). Given their generous yields and focus on the energy sector, this trio would have probably brought a smile to Rockefeller's face.
Slow and steady wins the race
Pipeline giant Enterprise Products Partners currently yields an attractive 6.7%. That payout is very secure because the midstream master limited partnership (MLP) generates about 91% of its earnings from predictable sources such as fee-based contracts, which provides it with stable cash flow. Meanwhile, the company only distributes about 80% of that money to investors through the payout, which is a conservative level for an MLP. In fact, it recently slowed down the distribution growth rate to improve its coverage ratio and provide it with more cash to invest in growth projects, making its payout even safer for the long term.
While Enterprise Products Partners might not be growing its payout as fast this year, it's still increasing the distribution, which is something the company has done throughout its history. Since going public about two decades ago, the company has raised its payout 63 times, including in each of the past 54 quarters. That streak should continue for the next few years, since the company recently finished $4.5 billion of growth projects and had $5.5 billion of expansions lined up for the next three years. These factors suggest that Enterprise should continue providing a slow-growing passive income stream to investors for years to come.
Get paid well while you wait
CorEnergy Infrastructure Trust operates similar assets as Enterprise, though instead of structuring as an MLP, it's a real estate investment trust (REIT). That means the company gets most of its revenue from collecting rent by leasing its energy infrastructure assets to oil and gas companies. Those leases provide very stable cash flow to CorEnergy, enabling it to support a lucrative 8% yield. That payout is also on solid ground, since CorEnergy paid out less than 80% of its cash flow last year and had a leverage ratio at the low end of its target range.
However, unlike Enterprise Products Partners, CorEnergy hasn't increased its dividend since late 2015. However, that could change this year. With the oil market improving and ample liquidity at its disposal, the company's focus this year is on growing its portfolio. CorEnergy hopes to close one or two acquisitions in 2018, which, depending on the size and some other factors, could enable the company to restart dividend growth.
A cleaner way to generate passive income
While TerraForm Power also operates in the energy sector, its focus is on producing renewable energy by operating wind and solar power plants. However, these facilities also generate very stable cash flow, since the company sells 95% of the power it produces under long-term contracts. Those agreements put its current 6.7%-yielding dividend on a firm foundation.
TerraForm currently pays out less than 80% of its cash flow from that dividend, leaving it with some money to reinvest in expansion projects. Those future expansions, along with an expected improvement in its operations, should enable the company to grow its cash flow to support 5% to 8% annual dividend growth through 2022. However, the company could raise its payout at an even faster rate if it makes acquisitions, with a recent deal in Spain enabling the company to increase its dividend 6% more than expected this year.
Worry-free income streams
What makes any one of these three stocks solid options for passive income seekers is that they all offer sustainable high yields backed by solid financial metrics. In fact, Enterprise and TerraForm have a clear line of sight to increase their already lucrative income streams for the next few years, while CorEnergy can get there if it's successful in making acquisitions. All an investor has to do after buying is sit back and let the dividends come rolling in each quarter.
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Matthew DiLallo owns shares of CorEnergy Infrastructure Trust, Enterprise Products Partners, and TerraForm Power. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.