Dividend champions are an elite group of companies that have raised dividend for at least 25 consecutive years. As of November 2022, there are 143 dividend champions, including the so-called dividend kings. Dividend champions represent a cross-section of the market that attracts income investors who love high-quality businesses.
Last month, I presented two picks from the dividend champions, i.e., Enbridge Inc. (NYSE:ENB) for high-yield seekers and T. Rowe Price Group, Inc. (TROW) for dividend growth investors. According to one of the criteria used in that analysis, the dividend yield should be not much less than the CPI, which at the time was 8.2% for September 2022.
Since then, the inflation rate has decreased to 7.7% for October 2022. The decline in CPI makes it necessary to have another look at the dividend champion.
Screening the dividend champions
There are two general strategies of income investing, namely, high-yield investing and dividend growth investing (aka, DGI).
For high-yield investing, we require a 10% hurdle rate of total return and, as mentioned above, a dividend yield not much less or, preferably higher, than the CPI, which was pegged at 7.7% as of October 2022, so that the combination of the current yield and dividend raises in the near future can beat inflation for retirees. Our stock-screening criteria imply stocks with a hurdle rate of 10% total return are expected to outperform the S&P 500 index by some 1.8%; the index averaged 1.86% in dividend yield and 6.37% in dividend growth rate between 2000 and 2021.
Three stocks meet the above criteria (Fig. 1). They are Altria (MO), Enterprise Products Partners L.P. (NYSE:EPD), and Enbridge. Altria has been discussed in detail in a previous article.
Dividend growth investing is a strategy for early or future retirees, who have many years ahead of them, during which dividend growth will compound. For dividend-growth investing, we require a >15% annual total return and a >15% dividend yield on cost in 10 years.
There are 17 stocks that have the ability to provide a >15% annual total return. However, because we prefer current dividends over future dividend increases, we decided to pick Enbridge and Altria. It is worth noting that Enbridge qualifies both as a high-yield and a DGI target.
EPD and ENB
Enterprise Products Partners and Enbridge are fully-integrated midstream energy companies, both having a diversified portfolio of assets.
- EPD is a midstream operator in the traditional sense, owning >50,000 miles of pipelines; >260 MMbbls of liquids and 14 Bcf of natural gas storage capacity; 24 natural gas processing facilities, 18 fractionators, 7 splitters, 11 condensate distillation facilities, 1 PDH facility, 2 iBDH facilities; and 19 deepwater docks handling NGLs, petrochemicals, crude oil, and refined products, all in the U.S.
- Enbridge, the larger of the duo, operates both in the U.S. and Canada. It owns 17,809 miles of liquids pipeline and 76,546 miles of natural gas pipeline; 60 MMbbls of liquids and 440 Bcf of natural gas storage capacity; 2,940 Mbbl/d of liquids export facilities; additionally, it owns renewable energy assets, from wind farms and solar energy, via geothermal and hydropower, to carbon capture and storage; it also invests in the Woodfibre, B.C. and U.S. Gulf Coast LNG facilities.
As of the 3Q2022, Enbridge had a higher adjusted EBITDA margin although EPD grew distributable cash flow (aka, DCF) faster on a year-over-year basis (Table 1).
Enterprise Products Partners currently yields 7.60%, slightly higher than Enbridge, although the former paid out less of its DCF. EPD raised cash distribution faster than ENB in the past year, while ENB has a stronger growth track record as well as an exciting growth outlook, especially in LNG export (Fig. 2).
Projecting the historical 10-year average dividend growth rate onto 2032, we obtain a dividend yield on cost of 15% for ENB and 11% for EPD. That means ENB can be taken as a DGI target.
Risks
Enterprise Products Partners and Enbridge boast some of the highest credit ratings in the midstream space, both at BBB+ or Baa1. These two companies are among the handful of best-run midstream concerns, so I am not worried about their operational risk.
EPD has a lower payout ratio and is undervalued relative to ENB. It probably has more to offer in terms of dividend safety. U.S. investors in ENB are exposed to foreign exchange uncertainties because it generates a substantial amount of revenue up north (Fig. 2).
Investor takeaways
In this monthly update of our analysis of the dividend champions, I compare Enterprise Products Partners and Enbridge, two midstream energy stocks that stand out in the group of 143.
Enterprise Products Partners features higher dividend yield, pays out less of its DCF, and is relatively undervalued, making it a great pick for high-yield investing, while Enbridge promises faster dividend growth and an exciting growth outlook, making it a great dividend growth investing target.
The Natural Resources Hub is the one-stop solution for income investors seeking the highest-quality dividend ideas, and for capital-appreciation investors looking to reap multi-bagger gains at moderate risks.
JoinThe Natural Resources Hubtoday to invest alongsideLaurentian Research, a proven picker ofhidden gem stocks and finder of market dislocations. ClickHEREfor a free trial now.
