The market is changing. It’s still a bull market, but with different heroes and goats.
The bull market that existed for the first three years since October of 2022 has turned upside down. For most of that time technology, and particularly AI stocks, soared while most other stocks did very little. Now, previously meandering stocks are killing it while technology sinks.
Over the past three months, eight of the eleven S&P sectors have outperformed the index, and none of them are technology. In fact, technology has been the worst performer of the eleven S&P 500 sectors over that period. Several cyclical sectors have posted 15% to 20% year-to-date returns while the S&P index is in negative territory.
Is this a lasting trend or a temporary aberration? The rally in non-tech stocks indicates investor confidence regarding the state of the economy in the quarters ahead. Will that economic growth materialize? Are technology and the AI trade finished, or is this just another periodic consolidation? Even if the current weakness proves temporary, will it end shortly or persist for most of the year?
No one really knows the answer. That makes it tough to invest. You don’t want to jump into some of these hot sectors after they’ve already had a big move. At the same time, you may not want to try to catch a falling knife in technology stocks.
Anything can happen in the next several months. Remember the pandemic? It’s easier to focus on the longer term instead of trying to guess the next temporary gyrations on Wall Street. Sectors go in and out of favor all the time. Industry leadership changes often. But one strategy has been a winner in just about every kind of market over time – dividend growth.
Over time, companies that continue to pay dividends have generated higher annualized returns with far less volatility than any other market segment. Dividend stocks have vastly outperformed non-dividend payers over time because of the dividend and the company.
Dividends have accounted for 31% of the S&P 500 total return since 1926. Although the percentage has been lower in recent decades, they still account for a significant part of returns, especially in flat or down years.
But even more important than the dividends themselves is the company. Businesses that can pay and maintain a dividend for long periods of time have consistent businesses with an established niche that reliably generates bankable revenue in any environment. Dividends are a great way to screen companies. These companies walk the walk. That said, companies that can do all the above plus consistently grow the dividend are at the next level and historically generate even higher returns over time.
It’s hard to say what kind of market it will be in three months or six months. Dividend growers tend to rise with the market if things go well and deliver strong relative performance when things go sideways or get dicey. These stocks transcend short-term market trends.
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You don’t have to reinvent the wheel. Navigate the uncertain market the way so many have successfully invested in uncertain environments throughout history. Bank on dividend growth with this legendary security.
A Legendary Dividend Growth Stock
Enterprise Product Partners L.P. (EPD)
Yield: 5.9%
Years of consecutive dividend growth: 28
Enterprise Product Partners is one of the largest midstream energy companies and Master Limited Partnerships in the country, with a vast portfolio of service assets connected to the heart of American energy Production. It is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies and offers export facilities in the Gulf of America.
Current assets include the following:
- 50,000 miles of pipeline
- 300 million barrels of liquids storage
- 20 deepwater docks
- 45 natural gas processing trains
- 26 fractionators
As a midstream energy partnership, Enterprise is not reliant on volatile commodity prices because they generate about 80% of revenues from fees for storing, processing, and transporting oil and gas. They collect tolls on the U.S. energy highway at a time when production is likely to increase substantially.
The first thing that probably comes to mind when considering EPD is the distribution. EPD currently pays a $2.18 annual dividend, which translates to a 6.2% yield at the current price. Is that massive yield safe?
As an MLP, Enterprise pays no income tax at the corporate level and pays out the bulk of earnings in the form of distributions. The payout ratio has been in the 65% to 80% range over the past few years, which is lower than most MLPs and enables the partnership to invest its own capital in growth projects at a lower cost.
Enterprise is commonly regarded as having one of the best balance sheets in the midstream space, with low debt, high credit ratings, and a surprisingly low payout ratio for an MLP. The payout also has a stellar 1.7 times coverage with cash flow, one of the best in the sector. It’s also an MLP that has increased distributions every year for 28 consecutive years. The distribution has continued and grown during recessions and depression-like environments for the energy industry. It should be rock solid in the years ahead.
EPD has performed very well over the last several years. Since the beginning of 2022, EPD returned 121% with distributions reinvested, which is more than double the S&P return of 51% over the same period. The MLP provided double the market returns with just a small fraction of the volatility.
Yet, despite the recent success, EPD still sells well below the all-time high with much higher earnings and a PE ratio of 13 compared to near 30 times for the overall market. It also has a beta of just .66, meaning it is a third less volatile than the S&P.
The future is shaping up to be even better. Not only is Enterprise expanding capacity at significant levels. It’s expanding in the highest growth area of the energy market, natural gas liquids (NGLs).
The partnership is building out gas and NGL processing facilities and pipelines from the booming Permian basin to boost capacity on routes to the Gulf Coast. It’s also expanding its export facilities.
Enterprise is on the cusp of more unitholder investment. The partnership invested $6 billion in expansion projects over the past few years. The new capacity should significantly expand cash flow and earnings.
Management also said that the partnership will be shifting money from growth projects to share buybacks and distributions over the next several years.
The dynamics of the energy industry should also be highly favorable to midstream energy companies in the years ahead. The global energy industry has had many years of capital underinvestment that will continue to limit supply amid ever-rising global demand, especially for natural gas.
The distributions will continue to flow in any kind of market. And the price has also proven resilient in the face of inflation, rising interest rates, and a slowing economy.
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