History tells us that dividends are a key component of investors’ total returns. In fact, dividends have contributed nearly 30% to the 10.4% annual total returns of the S&P 500 over the long run.
But as the Bob Dylan song goes, “The Times, They Are A-Changin’.”
The research team from the exchange-traded fund company, Wisdomtree, found the following:
- In the 1970s, a decade characterized by high inflation and weak economic growth, dividends made up 70% of total returns.
- The 1990s—the decade of the dotcom bubble—had the lowest contribution from dividends, of just 15%.
- The only decade with negative total returns was the 2000s. The dividend returns of nearly 2% provided a cushion to offset negative price returns driven by the bursting of the dotcom bubble and the Global Financial Crisis.
Wisdomtree also found that the dividend yield on the S&P 500 has steadily declined in recent years, lowering the expected return from this key component of long-term returns. It has been a growth-led (tech stocks) market over the past decade. That has led to the S&P 500 Index seeing a meaningful drop in its starting dividend yield of 2.0% to its ending yield of 1.5% over the past decade.
For me, this reality is what makes Tim Plaehn’s Dividend Hunter service unique. He finds dividend gems that are becoming increasingly rare (see below for how to join).
MLP Roller Coaster
One area where you can still find some dividend gems is in a sector that Wall Street loves to hate—energy, and more specifically, energy master limited partnerships (MLPs).
From mid-2014 until January 2016, oil crashed from around $100 per barrel to less than $30. The Alerian MLP Index dropped by more than 60% during the same period. Before the crash, MLPs paid out almost all of their free cash flow as distributions to investors. But the crash blew up the MLP business model of growth, paid for with new debt and equity.
The decline for MLPs continued as the companies restructured their businesses for lower growth going forward, so that, by the end of 2019, the financial picture for the sector was much improved. But then, in March 2020, the pandemic struck, triggering a crash for all high-yield investment categories, and MLPs dropped by more than 60% in a few short weeks.
The end result was that, from the 2014 peak to the March 2020 trough, the destruction on the MLP Index totaled 85%.
But then, from the nadir in the spring of 2020, MLP stocks soared. For example, Tim’s recommendation—the InfraCap MLP ETF (AMZA)—soared over 300%!
Bear in mind that the big gains in MLPs over the last few years likely won’t be repeated; however, investors will still be able to count on the sector for high yields, combined with high single-digit dividend growth. That is a formula for mid-teens compounding annual total returns.
Here is one example of an MLP that I like…
The company is Energy Transfer LP (ET).
On August 16, it announced a deal to buy rival Crestwood Equity Partners LP (CEQP) for about $7.1 billion, including debt. The transaction should close in the fourth quarter of 2023.
The deal made sense for Energy Transfer. The Crestwood acquisition will give it a larger share of energy transport in three top shale basins and grow the company’s position in the prolific Permian Basin oil and gas fields, which stretch across Texas and New Mexico, as well as the Bakken in North Dakota. It will also give Energy Transfer a foothold in Wyoming’s Powder River Basin.
Overall, the deal will add about 2 billion cubic feet per day of gas-gathering capacity, 1.4 billion cubic feet per day of gas-processing capacity and 340,000 barrels per day of crude-gathering capacity.
Even before this deal, Energy Transfer had a 125,000-mile network of oil and gas pipelines, which is among the largest in North America. The company said the new assets would allow it to funnel more hydrocarbons to its storage and processing facilities at Mont Belvieu, Texas, and to its export facilities at Nederland, Texas, and Marcus Hook, Pennsylvania.
In Energy Transfer’s latest earnings report, it was quite evident that the company’s main natural gas liquids (NGLs) business is quite robust. It owns approximately 5,650 miles of NGL pipelines with an aggregate transportation capacity of nearly 3 million barrels per day. The completion of expansion projects at its Nederland and Marcus Hook Terminals in 2020 and 2021 brought the total NGL export capacity to more than 1.1 million barrels per day. Energy Transfer’s Nederland facility is the second-largest NGL export facility in the world, and the company is able to export approximately 700,000 barrels of NGLs per day, supported by storage capacity for more than 3 million barrels of ethane, propane, butane, and natural gasoline.
In total, Energy Transfer exports more NGLs than any other company or country in the world, and its percentage of worldwide NGL exports is approximately 20% of the global market.
That’s a tremendous business. Add in a juicy yield of 9.1% (with dividends paid quarterly) and that makes ET a buy on any market weakness, in the $13.00 to $13.75 range.