A double-digit decline this year makes these high-yielding stocks look attractive for income seekers.
This year has been a pretty good one for energy stocks. Thanks to improving oil prices, the average energy stock as measured by the Vanguard Energy ETF (NYSEMKT: VDE) — which holds more than 140 energy stocks — is up about 6% for the year, outpacing the 4% gain for the S&P 500.
However, not all energy stocks have enjoyed an up year. Two of those laggards are TransCanada (NYSE:TRP) and Williams Companies (NYSE:WMB), which have both sold-off by double digits. Those declines have pushed their dividend yields above 5%, making them great options for income-focused investors to consider buying.
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Double-digit dividend growth at a double-digit discount
Despite getting off to a great start in 2018, shares of Williams Companies are down 10%. That sell-off doesn’t make sense given Williams’ improving financial profile and the growth it has coming down the pipeline.
Williams currently expects to generate enough cash flow to cover its 5%-yielding dividend by a comfortable 1.6 times this year. That will provide the company with excess cash that it can use, along with its balance sheet, to invest in high-return growth projects that it currently has under construction. Those expansions position the company to boost its dividend another 10% to 15% in 2019. Meanwhile, at the same time Williams expects to grow the dividend, the company also sees its leverage ratio falling from 5.0 times to less than 4.75 next year.
That trend of a steadily rising dividend and further balance sheet improvement should continue in the coming years thanks to the expansion projects the company has in development. Williams has already identified more than $20 billion of expansion opportunities, including $5 billion of projects that it’s close to sanctioning. That makes the company’s future look bright, which is why this dividend stock seems like a great one for the long term.
It just keeps refilling its growth tank
TransCanada’s stock is down about 14% for the year even though the company reported solid first-quarter results. That sell-off is a head-scratcher because like Williams, TransCanada has lots of growth up ahead.
The Canadian pipeline giant currently has 21 billion Canadian dollars ($16 billion) of expansion projects underway, which positions it to grow earnings at an 8% to 10% pace through 2021. Because of that, TransCanada believes it can increase its 5.2%-yielding dividend toward the upper end of an 8% to 10% annual rate through 2020 and by another 8% to 10% in 2021.
In the meantime, TransCanada has another CA$20 billion ($15.3 billion) of longer-term projects under development. Two large ones are close to coming to fruition: the $8 billion Keystone XL pipeline and the CA$4.8 billion ($3.7 billion) Coastal GasLink pipeline, which could both start construction next year. Given their size, these projects have the potential to move the needle for TransCanada in the future. Add in the fact that TransCanada has one of the stronger financial profiles in the pipeline sector — including a well-covered dividend — and the company appears poised to increase its payout at a close to double-digit pace for the next several years.
Income with upside but for a lower price
Both TransCanada and Williams are on pace to grow their cash flow and dividends at a healthy pace in the coming years. Despite that fact, both stocks have sold off this year, which has pushed their dividend yields to an attractive level. That gives investors the opportunity to lock in what looks like an excellent income stream both now and in the future, which is why they look like great stocks to buy.
This article originally appeared on The Motley Fool.
