Benjamin Graham, the investor who was a mentor to Warren Buffett, long preached that even a good company could be a bad investment if you paid too much to buy it. In other words, valuation matters, even when you are considering dividend stocks. Which is why income-focused investors might still be interested in Enterprise Products Partners (EPD -1.78%), be timid with regard to Chevron (CVX -3.04%), and want to hold off on Nucor (NUE -3.83%). Here's a look at each.
Still worthwhile
Master limited partnership (MLP) Enterprise Products Partners is a giant in the North American midstream sector. It owns a virtually irreplaceable portfolio of pipelines, storage, processing, and transportation assets that help to move oil, natural gas, and the products into which they get turned around the world. The vast majority of its business is fee-based, so demand for energy, which should remain strong for years, is more important than commodity prices. The core business is very stable.
That helps explain how the MLP has managed to increase its distribution annually for 24 consecutive years. A modest amount of leverage and currently robust distribution coverage help, too. The distribution yield is a very high 7.3%. While the yield has been higher in the past, it is currently near the high side of the historical yield range. That suggests the units are trading at an attractive level.
To be fair, the yield is likely to make up the lion's share of an investor's return. But if you are looking to maximize the income your portfolio generates, Enterprise is still worth a close look today.
Maybe, but it depends
Integrated energy giant Chevron is a harder call. This company operates across the energy sector, with upstream (drilling), midstream (pipelines), and downstream (refining) exposure. While this provides some balance to the portfolio, at the end of the day, the prices of oil and natural gas are still the driving force on the top and bottom lines. Given that energy is cyclical, the business and the stock are both prone to material swings over time.
Right now Chevron is offering investors a roughly 3.5% dividend yield. That's about middle-of-the-road, historically speaking, so the stock does not look like a screaming buy today. And, notably, you could probably earn more interest in a high-yield money market account today. During recent energy downturns the yield has spiked to as much as twice its current level. However, if you are looking to add energy exposure to your portfolio, Chevron at a reasonable price might still be a solid call.
The key here is that Chevron has increased its dividend annually for 36 consecutive years despite the inherent volatility of the energy industry. Part of that resilience comes from its rock-solid balance sheet, which is the strongest in its peer group. That gives the energy giant the financial leeway to take on debt during downturns so it can continue to support its business and dividend. If you want oil exposure, but don't want to take on too much risk, Chevron remains a solid, though perhaps fully priced, option.
Stay away
The last name on this list is Nucor. It is one of the largest steelmakers in the United States and has a highly diversified portfolio. With a long history of growth behind it, the company tends to invest during downturns so it can come out the other side an even stronger competitor. It has also been focused on increasing the amount of specialty steel products it produces, which offer higher margins and guarantee demand for its own commodity steel production. Like energy, steel is highly cyclical, but that hasn't stopped well-run Nucor from achieving Dividend King status with five decades of annual dividend increases under its belt.
The problem here isn't the quality of the company, but the valuation. Investors are well aware of how well run Nucor is and the yield is currently just 1.4%. That's near the low end of the historical yield range and basically sitting at its lowest point over the past decade. It's a great company, but now isn't the time to jump aboard.
Be selective
It's easy to find passive income stocks that are backed by companies with incredible businesses. All you need to do is look for brilliant dividend histories -- the longer the increase streak the better. But that alone doesn't make a stock a good buy, as Nucor's historically low yield points out. Enterprise Product Partners' historically high yield is a much better choice, while Chevron is worth considering if you want direct energy exposure, but you'll be paying full price.
