In periods of rising inflation and slowing economic growth, investors often turn to the reliability of dividend stocks to see them through, and with good reason.
The asset managers at Hartford Funds looked at the performance of the S&P 500 going all the way back to 1930 and found that dividends accounted for 40% of the total return of the index over that 92-year period. Equally important, the dividend stocks in the index never had a decade where they produced a negative return.
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The study also found that from 1960 on, dividends made up an astounding 84% of the index's total return. Reinvesting dividends in the benchmark, coupled with the power of compounding, would have turned a $10,000 investment into more than $4.9 million compared to the $796,000 that grubstake would have become based just on the index's price alone.
While you might be tempted to buy high-yielding stocks to juice the returns, simply chasing yield is a risky pursuit because many stocks with higher yields often carry higher risk. But that doesn't apply to every stock, so an investor needs to pick and choose which ones they want to invest in, and the following pair of dividend stocks happen to not only be solid income stocks, but they also offer above-average yields that you can hold onto forever.
Antero Midstream
Natural gas specialist Antero Midstream (AM -0.40%) is a midstream operator in the energy field. It owns gathering pipelines, compressor stations, and processing and fractionation plants, which separate hydrocarbon mixtures from natural gas into individual products, primarily for Antero Resources (AR -1.32%), an independent oil and gas company.
Because it operates on long-term, fixed-fee contracts, its exposure to fluctuations in commodity prices is limited. For example, its gathering and compression agreement expires in 2038, while its water handling contract expires in 2035. As a result, its operating cash flows tend to be very stable and highly predictable.
While many oil and gas operators have been very volatile through the energy crisis we've experienced, Antero Midstream can provide investors with peace of mind. It might miss out on some of the upside some less stable operators are enjoying as a result of the epic turmoil in the markets, but its downside will be protected as well.
Antero Midstream is trading at 14 times next year's earnings and just 8 times the free cash flow it produces. It is transitioning to generating consistent free cash flow after dividends. While Antero Midstream doesn't ever really trade at much of a premium, it still indicates this company, whose dividend is currently yielding 7.9% annually, is worth adding to the long-term portion of your portfolio.
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Enterprise Products Partners
Another midstream operator to consider is Enterprise Products Partners (EPD 0.51%), which primarily focuses on the pipeline transport of natural gas liquids (NGLs) -- such as ethane, propane, and butane -- and exporting them globally. It owns some 50,000 miles of pipelines, 23 NGL processing plants, 14 billion cubic feet of natural gas storage, and over 260 million barrels of storage capacity for NGLs, crude oil, refined products, and petrochemicals.
While Enterprise operates with long-term fixed-fee contracts like Antero, it also enters into contracts with take-or-pay provisions that allow it to get paid regardless of whether its customers accept delivery of the product.
Enterprise Products Partners is one of the largest master limited partnerships (MLPs), meaning it is required to pass along almost all of its profits to its shareholders in the form of dividends. There's plenty of cushion for future growth of its payout, too.
In the third quarter, its distribution was 56% of its adjusted cash flow from operations (CFFO), with its distribution coverage ratio, or the amount of cash flow available for distribution versus what it actually disburses to its shareholders, standing at 1.8.
Although the ratio should typically not go below 1, which would imply the dividend is unsustainable, investors would find any MLP cutting it that close much too risky. Instead, they seek out a margin of safety while demanding growth capital spending come primarily from operating cash flows.
In its recently reported third quarter, Enterprise expects growth capex to be $2 billion for 2023, while it generated $1.9 billion in operating cash flows for the period.
Stocks like Enterprise Partners can trail others when the markets are booming, so the key is to hold on through the cycles and reinvest when the stock lags. With its dividend yielding 7.7% annually, you'll likely be well rewarded for your patience and owning its shares for the long term.
