The story behind the interview...
If you could only invest in 5 stocks, which 5 would you pick? That was the question I challenged Dividend Sensei with.
As expected, he did not disappoint.
For those who prefer to read, my full interview notes are copied below.
If Dividend Sensei could only have a 5 stock portfolio…
Qualifications for making the cut:
Must be a stock you could buy and ignore for a decade
Yield is important: Safe 4+% yield is the dream, an unsafe dividend is not worth owning, "share price is vanity, cash flow is sanity"
Stable and recession resistant: Defensive, cash flow under long-term contracts, not dependent on consumer spending
Strong balance sheet relative to industry
Management: Need to trust management knows what it is doing, long-term focused with a track record for delivering
Growing dividend: 4% and growing faster than inflation is key
Note: Dividend Sensei and I discussed 3M in a previous interview
2.7% yield (lowest on the list) with a 10% long-term dividend growth potential and almost 60 years of continuous dividend increases
They have their hands in every major growth trend with over 60,000 products in over 200 countries
3M has averaged a total annual return of 12.2% for 30 years and expects to continue
NextEra Energy Partners (NEP)
Yields 3.8% with a cash flow payout ratio of 28%
37% growth in cash flow this quarter
Parent company builds solar and wind projects at a fast pace and sets up 20-30 year inflation adjusted contracts, then sells to NEP who gets cash flow
Expect a 12-15% payout growth through the end of 2023 (Cash flow is growing faster than payout ratio)
Have 3.5 gigawatts of solar and wind projects today and the parent company has 28 now and will have 40 between 2020-2040. There is a giant backlog in the process with the potential to fuel growth
NEP has great bear market protection with self-amortizing non-recourse loans at the project level. They will lever up $1 in equity and borrow $4 to buy projects. Lenders can only go after individual projects in the event of an unlikely default. As a result, they have no dependency on equity markets for funding
Can grow cash flow at 30-40% per year for 10+ years
Next Era is expecting to grow US solar capacity by over 40% by 2025
Annual total growth of 19%
Brookfield Infrastructure Partners (BIP)
Note: Dividend Sensei and I discussed BIP in a previous interview
4.7% yield and 95% of cash flow is from long-term contracts or regulated industries
Managed by Brookfield "The Berkshire of Infrastructure"
Have grown distributions by 11% since formed 10 years ago and analysts expect this to be 9% going forward
Expects 12-15% annual total growth going forward
Brookfield Renewable Partners (BEP)
Like BIP but focus on renewable energy: wind, hydro, solar, storage
Yield 6.4% with a payout ratio of 79% (long-term goal is 70%)
Currently has 16 gigawatts of renewable energy, largely hydropower, and expects to expand by 8 gigawatts in coming years
Their business model is to buy up high quality, distressed, high moat assets at big discounts
Growing cash flow at 17% per year, has a BBB+ credit rating, a strong balance sheet, and strong access to capital
Looking at 12-15% long-term annual total growth
Enbridge Inc (ENB)
The "Berkshire of Midstream"
Own North America's largest distribution system for energy resources (oil, NG, etc)
99% of cash flow is long-term contracts of 20-30 years. Contracts are with mostly utilities. They get paid no matter what happens and therefore, have no commodity sensitivity
BBB+ credit rating, strong balance sheet
Pay 6% dividend (grow by 10% each year) with a 65% payout ratio and aim to reduce to 55%
Have a 100% self-funded business model, so they are not sensitive to equity markets
Expect 14% annual total return
Using Gordon dividend growth model to calculate annual total return (the method also used by Brookfield)
Stock starts at fair value and the payout ratio remains constant
The dividend will grow as fast as earnings and cash flow
Bases total returns on current yield and growth rate of cash flow which is equal to growth in dividend
Summary of the 5 stock portfolio selections...
4.7% avg. dividend with a 59% cash flow payout ratio
Long-term dividend growth of 10.1% for next 10+ years
Total expected return of 14.8% per year
Quadruple your investment over next decade
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Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. Brian and Investor in the Family make no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Brian and Investor in the Family will be met.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.