Dividend stocks can be great creators of wealth. Since 1973, dividend payers have outperformed the shares of the S&P 500, according to data from Ned Davis Research and Hartford Funds. However, the fact that a company pays a dividend does not guarantee success. Companies that steadily increased their dividends generally beat the market, while those that kept it level or cut or eliminated their payments generally underperformed.

Faced with this distinction, some of our contributors have taken a critical look at dividend stocks. This led them to highlight two dividend-paying stocks that they think seem like good buys – Crestwood Equity Partners (NYSE: CEQP) and Enterprise Product Partners (NYSE: EPD) – and an investor could consider selling, in Compression Partners in the United States (NYSE: USAC).

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Adding a new fuel source

Matt DiLallo (Crestwood Equity Partners): Crestwood Equity Partners pays one of the most attractive dividends on the market middle energy sector. The Master Limited Partnership (MLP) is currently earning 8.8%. While a dividend yield this high level could sound the alarm bells, a closer look at the numbers shows that Crestwood’s payout is strong and becoming more sustainable by the day.

For example, the MLP generated enough cash to cover its distribution a comfortable 2.18 times during the third quarter. This left him with money to cover his capital expenses with room to spare. As a result, Crestwood has also been able to maintain a strong balance sheet. He ended the quarter with a conservative leverage ratio of 3.45 times the debt-to-earnings ratio before taxes, interest, depreciation and amortization (EBITDA).

This gave Crestwood a lot of financial flexibility, which she is now using to acquire another MLP Oasis intermediary partners (NASDAQ: OMP) for $ 1.8 billion. This transaction will further improve its asset base and increase its cash flow while maintaining prudent financial measures. Crestwood expects distribution coverage to remain above twice while leverage will remain below 3.5 times debt to EBITDA ratio. For this reason, Crestwood plans to increase its already attractive distribution by 5% when the deal closes next year.

The Oasis Midstream deal provides a model for future growth as Crestwood can become a consolidator in the midstream. While its MLP structure isn’t for everyone, Crestwood’s financial strength and upside potential make it a great option for income investors looking to buy low-risk, high-yield dividend stocks.

This 8% yield is safe

Neha Chamaria (Enterprise Product Partners): Shares of Enterprise Products Partners have fallen nearly 9% since the last week of October, with the pipeline company’s third-quarter figures released earlier this month putting the stock under even more pressure after its profits plummeted. barely budged despite an increase in income. Now, here’s what the market needs to understand: Mid-level oil and gas companies should generally earn stable income, as they generate most of their income under long-term fee-based contracts that do not fluctuate with fluctuations. oil and gas prices. This is exactly what Enterprise Products Partners did: earn a stable income in the third quarter.

In addition, most investors invest in shares of Enterprise Products Partners for its dividends. Since high depreciation can drive down profits and not reflect the true picture of a midsize oil and gas company’s performance, what matters is cash flow or whether a company generates enough cash flow. cash to cover dividends and invest in growth.

Enterprise Products Partners didn’t leave much room to complain – it generated record cash flow worth $ 2.4 billion and Distributable Cash Flow (DCF) worth $ 1, $ 6 billion in the third quarter, which comfortably covered its distribution (or dividends) 1.6 times. The company also invested approximately $ 430 million in growth projects during the quarter.

This suggests that Enterprise Products Partners’ high 8% dividend is pretty safe. With growth capital spending expected to be lower next year as well, the company should not only be able to hedge its distribution well, but also increase its dividend again even if oil prices fall. In short, if you’re thinking of buying Enterprise Products Partners shares for its dividend, I don’t see why its third quarter numbers should deter you from taking a straight dive.

Too many risks

Brewer Ruben Gregg (Compression Partners in the United States): I am a dividend investor and high yields attract me like a light to a moth. This is why USA Compression Partners and their massive 13% distribution yield popped up on my radar screen. Yet a quick glance proved to me that the fat yield is just not worth the risk. And most investors should probably follow my lead.

For starters, USA Compression Partners is a master limited partnership, which is a complex business structure requiring unitholders to process a Form K-1 at tax time. This can be confusing and may even require you to hire a tax professional. MLPs also don’t work well with tax-advantaged savings accounts and are often seen as problematic on Capitol Hill because of the tax benefits they offer. If you try to keep it simple like I do, then MLPs are not your best bet.

In addition to this, USA Compression Partners provides services to the highly cyclical energy industry. Essentially, it provides the machines that maintain high pressure on pipelines and in drilling environments. It’s not a bad deal in and of itself, but when times get tough, the cast can start to seem a little questionable. For example, during the 2020 pandemic, distributable cash flow did not fully cover distribution. Coverage was only slightly above 100% in the second quarter, thanks to the rebound in the energy sector, but it would be difficult to characterize the distribution as “safe”.

Meanwhile, from a global perspective, energy service companies tend to be even more cyclical than the drillers they serve and it’s just too risky for me to go into a barely hedged return. , although huge. I am much happier with lower returns from a more stable business.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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Margarita W. Wilson

The author Margarita W. Wilson