SEP Stock: Earn a Safe 6.5% Yield from This Top Dividend Stock
This High-Dividend Stock Now Pays 6.5%
Most high-yield stocks are not known for their dividend safety, which is why this 6.5% yielder is special.
The stock is based on a rock-solid business. And despite its generous payouts, its dividends are more than safe.
I’m looking at Spectra Energy Partners, LP (NYSE:SEP).
Let me guess: you are likely wondering how on Earth an energy company can pay safe dividends. Didn’t a whole bunch of them cut their payout not that long ago?
Well, while the partnership operates in the energy sector, its business doesn’t really have much exposure to commodity prices. That’s why instead of cutting its payout, Spectra Energy stock was actually raising its distributions during the downturn in oil and gas prices.
The chart below shows the partnership’s distribution history since 2009.
Source: “Distribution History,” Spectra Energy Partners LP, last accessed August 16, 2017.
As you can see, this top dividend stock has increased its payout every single year. In an era where many oil and gas companies are deep in the doldrums, being able to raise dividends consistently is truly commendable.
In fact, since Spectra Energy’s initial public offering (IPO) in June 2007, it has been raising its payout every single quarter. That’s 39 consecutive dividend hikes in just over 10 years!
The latest dividend hike was announced earlier this month, when Spectra Energy’s board of directors declared a cash distribution of $0.71375 per unit. At the current price, this top dividend stock has an annual yield of 6.54%. (Source: “Spectra Energy Partners Announces 39th Consecutive Quarterly Cash Distribution Increase,” Spectra Energy Partners LP, August 2, 2017.)
But to be honest, if you know what Spectra Energy’s core business is, it’s pretty easy to see why it managed to pay a steadily increasing stream of dividends.
A Rock-Solid Business
Headquartered in Houston, Texas, Spectra Energy owns and operates pipelines and storage facilities for natural gas and crude oil.
The entire business of Spectra is fee-based: energy companies pay the partnership a fee to transport and store energy products. Spectra does not engage in any exploration and production activities, so it does not have to worry about commodity price movements that much.
Of course, some of Spectra Energy’s clients do have exposure to commodity price risk. And if they have less oil and gas to move and store, Spectra’s business could be impacted.
The good news is that over 90% of Spectra Energy’s revenue comes from fees that reserve capacity of its midstream assets. In other words, most of its future revenue is predictable and the partnership has minimized its volume risk. This business model allows Spectra to generate steady cash flows—something of utmost importance to a top dividend stock.
And don’t forget that building a pipeline is no easy feat. Once a set of midstream infrastructure is in place and operating, it’s almost impossible to get the approval to build another set of pipelines running side-by-side. So even though the partnership is running a lucrative business, it does not have to worry too much about competition.
With over 15,000 miles of transmission pipelines, Spectra Energy is essentially running a cash cow business. And with a 6.5% yield, it is a top dividend stock for income investors to consider.