SEP Stock: Retire on This 7.3% Dividend Yield (That’s Still Growing)
Top Retirement Stock You Likely Haven’t Considered
Retirement investors don’t like risk. Unfortunately, in today’s market, high-yield stocks are not known to be the safest bets. It’s not uncommon for an investor to put their savings into a 15% yielder only to find the dividend is cut a month later. If you are looking to generate a steady stream of dividends to supplement the income in your golden years, you would not want to be that investor.
So, does that mean retirement investors have to settle for a low return on their income portfolios? Not necessarily. While the average yield of all S&P 500 companies stands at a disappointing 1.83%, there are solid dividend-paying companies with yields substantially higher. These companies don’t make headlines very often, which is why uncovering them is what we love doing most here at Income Investors.
Over the last several months, one hidden dividend-paying gem has caught my attention: Spectra Energy Partners, LP (NYSE: SEP).
Headquartered in Houston, Texas, Spectra Energy is a master limited partnership (MLP) that owns and operates pipelines and storage facilities for natural gas and crude oil. Its portfolio currently consists of more than 15,000 miles of transmission and gathering pipelines, 170-billion cubic feet of natural gas storage, and approximately 5.6-million barrels of crude oil storage.
At first, I noticed SEP stock because of its well-above-average dividend yield. Paying quarterly distributions of $0.72625 per unit, the partnership offers an annual yield of 7.3%.
What’s more impressive is Spectra Energy’s ability to raise its payout. The partnership completed its initial public offering (IPO) in 2007. Since then, it has increased its per-unit distribution every single quarter. In other words, even though SEP stock has been around for just over 10 years, it has delivered 40 consecutive dividend increases. (Source: “Distribution History,” Spectra Energy Partners, LP, last accessed December 5, 2017.)
Just think about that. Our economy went through a lot over the last decade, but neither the Great Recession nor the downturn in commodity prices managed to stop Spectra Energy from raising its payout to income investors.
The reason behind the partnership’s track record lies in its stable business model. Although Spectra Energy operates in the energy sector, its focus on the transportation and storage business means all of the revenue is fee-based. This allows the partnership to have no direct exposure to volatility in commodity prices.
Furthermore, Spectra Energy minimizes its volume risk through contracts that reserve capacity on its pipelines and storage facilities. Approximately 95% of the partnership’s U.S. natural gas transmission revenue comes from these reservation contracts, which have a weighted average remaining contract life of nine years.
Thanks to a fee-based business model and long-term reservation contracts, Spectra Energy is well-positioned to generate steady cash flows throughout economic cycles and commodity price cycles.
And the best could be yet to come. In the third quarter of 2017, the partnership generated $398.0 million in distributable cash flow, representing a 27.2% increase from the year-ago period. For a partnership that’s willing to return cash to investors, growing distributable cash flows will likely lead to higher future dividends. (Source: “Spectra Energy Partners Reports Third Quarter 2017 Results and Announces 40th Consecutive Quarterly Cash Distribution Increase,” Spectra Energy Partners, LP, November 1, 2017.)
Indeed, for 2018, Spectra Energy is targeting a distribution growth rate of seven percent while maintaining a solid distribution coverage ratio of 1.1 times to 1.2 times. In 2019 and 2020, the partnership expects distribution growth to be in the range of four percent to six percent annually. (Source: “Spectra Energy Partners, LP Announces 2018 Guidance, Long Term Financial Outlook and Receipt of Offer to Eliminate Incentive Distribution Rights,” Spectra Energy Partners, LP, November 29, 2017.)
In other words, if investors lock in SEP stock’s 7.3% yield today, they will likely earn a much higher yield on cost a few years from now.
On a side note, consistent dividend increases also help the partnership to attract the right type of investor. The energy industry has always been known for its volatility. Ideally, energy companies would want long-term investors rather than those that buy the stock to make a quick buck. This is because long-term, patient investors who understand the business will be less likely to ditch the stock when the company misses one quarter of earnings expectations.
And since Spectra Energy has been raising its payout through thick and thin, it has likely built a long-term shareholder base. This can be seen from the movements in its share price. We all know that many energy stocks plunged quite dramatically due to the recent downturn in oil and gas prices. SEP stock, on the other hand, returned a solid 33.8% over the last five years.
Bottom Line on SEP Stock
After nearly a decade of pursuing ultra-low interest rate policies, the U.S. Federal Reserve has finally started to lift off. However, even with multiple rate hikes, fixed income products still don’t pay much. Right now, yield on the benchmark 10-year U.S. Treasury note stands at just 2.356%. In this environment, Spectra Energy Partners’ growing 7.3% yield could go a long way towards boosting the return of a retirement portfolio.