Image source: ONEOK.
With interest rates as low as they are, it's hard to find high-yielding investments. That's a problem for income investors, but fear not. All is not lost. If you're careful, you can find some compelling investment opportunities that can provide you with a notable income stream. For example, Enterprise Products Partners (NYSE: EPD) , ONEOK, (NYSE: OKE) , Suburban Propane Partners LP (NYSE: SPH) , Ferrellgas Partners, L.P. (NYSE: FGP) , and Caterpillar (NYSE: CAT) are all dividend stocks you definitely want to consider.
In the middle
Enterprise and ONEOK both reside in the oil and gas midstream segment, but they are different creatures. Enterprise is a limited partnership that owns and operates roughly 50,000 miles of pipelines and a portfolio of storage, processing, and terminal facilities. ONEOK is a regular corporation that is the general partner of, and owns about 40% of, ONEOK Partners LP (NYSE: OKS) , a partnership that owns around 37,000 miles worth of pipelines. So ONEOK basically runs its affiliated LP, collecting fees and incentive payments along the way.
Both Enterprise and ONEOK sport yields of around 6.1%. That's a number that should interest investors looking at bank accounts that yield virtually nothing. The problem, of course, is that these two companies are in the energy patch, and that whole area is under pressure right now. However, midstream assets are largely toll-taker businesses, in which the volume of material flowing through their pipes is more important than the price of oil or gas.
This is big. For example, Enterprise has increased its distribution for 47 consecutive quarters. That includes the current downturn. And it's got roughly $6 billion worth of projects that it's working on right now that should come on line over the next two to three years to keep that streak going.
One of the knocks against ONEOK was that ONEOK Partners was more exposed to commodity prices than some of its peers. However, that's changing. Fee-based income is expected to make up 85% of earnings this year, up from 66% in 2014. That means ONEOK, and the partnership it runs, will have much more stable income streams. And while ONEOK isn't expecting to raise its dividend this year, it anticipates a strong coverage number of around 1.3. The story here, then, is about a company that's transitioning to become a more stable dividend payer.
Image source: Suburban Propane.
The "other" fuel
The next two picks sport higher yields, with both Suburban and Ferrellgas offering yields in the 11% range. If 6% got you excited, 11% probably has you salivating and perhaps wondering why the yields are so high.
The answer is that Suburban and Ferrellgas are in something of an unloved and misunderstood sector: propane. Propane is a byproduct fuel created by the oil and natural gas industries. But it's used extensively for heating homes in hard-to-reach locations, drying crops, and in warehouses for lifts -- and, yes, for grilling in the backyard. It's not sexy, but it is important.
The thing is, Suburban and Ferrellgas are largely distributors. They pass on the costs of the propane they deliver. That means demand is far more important than commodity prices. However, the past few winters have been pretty warm, so demand has been weak. And propane prices have been low, too, which makes the top line look horrible even though it doesn't really affect the bottom line, something that those not in the know often don't realize.
Suburban, for example, saw revenue decline 25% in fiscal 2015, but net income declined only about 11.5%. The real reason for the net-income decline was that deliveries slipped 10%. FerrellGas delivered around 12% less propane in the first half of its fiscal 2016 year. So far this doesn't sound so good. But both partnerships have lived through warm winters before and both increased their distributions last year. And since acquisitions are a big part of the industry, tough weather should make it easier for this pair to find bolt-on purchases.
There is one other detail worth noting. Suburban is a pure-play propane distributor. FerrellGas has recently begun expanding into the midstream space, which now makes up about 25% of the top line. That business shift means that FerrellGas is a way to play both the midstream and the propane businesses in one investment -- with a hefty yield, if you were looking to do such a thing.
Image source: Caterpillar.
Serving the miners
Caterpillar's yield of 4.2% or so kind of pales in comparison with those the other companies here offer. But the interesting thing is that Cat provides indirect exposure to the mining and construction industries, two areas that have been hard hit of late, with plenty of dividend cuts thrown in the mix. That helps explain the company's falling sales and the concerns over the company's ability to maintain its over 20-year streak of annual dividend increases.
But here's the thing. Caterpillar is working hard to trim costs and right-size its business for the current market environment. Its restructuring efforts have come at a cost. But those costs aren't ongoing. So in the first quarter, Cat's earnings were well below those of a year ago, but if you pull out the restructuring costs, earnings jump 45% higher. That doesn't mean there's no risk of a dividend cut, but it does suggest that there's a light at the end of the tunnel once Cat's markets stabilize. And since the heavy-equipment maker didn't cut its dividend through the deep 2007-to-2009 recession, for more aggressive types Cat is probably worth the extra risk to gain a little tangential exposure to the deeply out-of-favor mining industry.
Thirsty for yield?
Income investors are being starved right now. That's led some to take on a lot more risk then they realize with exotic new investments such as yieldcos, which have since proved ill-advised options. Enterprise and ONEOK are two energy players that provide a generous income stream and plenty of security because of their toll-taker models. Suburban and Ferrellgas sport pretty hefty yields because the weather hasn't gone their way and investors don't really understand their business. But they've survived warm patches before and lived to tell about it because they're large enough to use downturns to their advantage. And Cat is on the periphery of a deeply out-of-favor sector and feeling the pinch of declining demand. Although this one is more appropriate for investors willing to step out a bit on the risk scale, history suggests Cat is willing to protect its dividend even as it works to right-size its business.
While you might not like all of these high yielders, it's worth your time to consider each of them. There's a good chance you'll find that dividend gem you've been searching for.
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