Last week was a great week to be a dividend investor. Not only did two of my top stocks declare fresh dividends, but both companies also raised those payouts. The ability to enjoy a rising dividend is one reason why I much prefer the income from my dividend stocks than the fixed rate I could be earning on a bond.
But not all dividend-paying stocks are equal. Some companies pay unsustainably high dividends, which is why it is important to double check the company’s ability to actually pay its dividend, even if a raise would suggest investors have nothing to fear. With that in mind, let’s drill down a bit deeper into the two companies that just gave me a raise.
A gushing of income growth
Oil and gas production company, ConocoPhillips (NYSE:COP), announced that it was providing investors with a 4.5% raise this week. The company’s CEO, Ryan Lance, pointed out that “[a] compelling dividend is a key part of our offering to shareholders and this increase is aligned with our commitment to target consistent dividend growth over time.” This is actually the first raise investors have seen in a while because the company has been in the process of a major three-year repositioning program in which it shed billions of dollars in assets, including its refining arm Phillips 66 (NYSE:PSX).
To be fair, investors that held on to shares of Philips 66 after it was spun out are already enjoying an implied dividend increase. Additionally, Phillips 66 (NYSE:PSX) already raised its payout substantially since hitting the public markets. However, those who have only held ConocoPhillips stock haven’t received a raise since 2011.
Now that its repositioning is largely complete, ConocoPhillips (NYSE:COP) can focus on delivering returns to investors. One way it plans on doing that is by focusing on growing both its production and its margins by 3%-5% annually through 2017. It’s doing so by ramping up its production in five significant areas, which gives the company visible growth. Its dual focus on growing both production and margins should yield a significant boost in its profits.
In fact, ConocoPhillips (NYSE:COP) believes it will produce about $6 billion of incremental cash flow over that period. What that means is that its newly raised dividend is not only safe, but likely heading higher in the future. Further, as you can see from the chart below, that growth is coming from the areas where Conoco can get the best margins.
Source: ConocoPhillips Investor Presentation
Producing steady returns
The other dividend-paying stock I want to take a brief look at is Enterprise Products Partners L.P. (NYSE:EPD). Investors in Enterprise have actually enjoyed a rising dividend for 36 consecutive quarters. Moreover, it’s the 45th distribution increase since Enterprise Products Partners L.P. (NYSE:EPD) went public in 1998. That’s a great history, and one that’s likely to continue repeating.