To The Midstream For Dividends

Once again, the energy sector and related exchange traded funds are scuffling, but funds such as the Alerian Energy Infrastructure ETF ENFR can soften some of that blow with stout dividends and prospects for higher payouts.

What Happened

ENFR, which yields 6.1%, follows the Alerian Midstream Energy Select Index. As evidenced by that name, the benchmark emphasizes midstream energy infrastructure assets and that could prove to be a good place to be this year for income-starved investors.

While fourth-quarter earnings seasons for many midstream companies is just getting started, some of the names from the group that have reported are giving positive indications about 2020 payout growth.

“Out of the nine companies, four companies expect to grow their payouts by 10% or more in 2020. All nine companies are guiding to growth of 5% or more,” Alerian said in a recent note.

Why It's Important

Some ENFR holdings, such as Kinder Morgan Inc. KMI are guiding to massive dividend increases this year.

“Some of the largest US and Canadian midstream companies are guiding to robust annual dividend growth in 2020,” according to Alerian. “After growing its dividend by 25% in 2019, Kinder Morgan (KMI) is planning another 25% increase in 2020, which would bring its dividend up to $1.25 per share on an annualized basis. The outsized dividend growth marks a recovery from KMI’s 2015 dividend cut.”

About two-thirds of ENFR's roster is allocated to oil and natural gas pipeline operators – companies that shouldn't be sensitive to fluctuations in prices of those commodities. However, many pipeline firms have tailed oil prices lower, giving ENFR a similar if not deeper value to that of the broader energy sector.

What's Next

While oil recently slipped into a bear market, pressuring ENFR in the process, the fund offers value and not just dividend stability, but growth potential, too. In fact, it could be that payout growth that provides support for ENFR against the backdrop of sagging crude prices.

“The midstream space can be divided almost equally into three groups – those with solid 2020 guidance, those with no guidance but a trend of growing, and those that have had steady payouts for some time,” notes Alerian.

“Of course, a few names break the mold due to a recent cut (ENLC) or guidance to maintain the dividend (EQM, ETRN). Overall, it is encouraging to see many names growing their dividends sequentially, and companies that have cut in the past resume growth. Additionally, with midstream companies approaching a free cash flow inflection point, particularly in 2021, it’s possible that excess cash flow will drive further dividend growth.”

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