After months of speculation, the Federal Reserve has finally started cutting interest rates. Moreover, the Fed has indicated that it will continue to lower interest rates.
Falling interest rates have major consequences. You may have noticed that your bank has lowered the interest rate on your savings account or that the interest rate on CDs and U.S. Treasury bonds is no longer as attractive as it used to be.
While interest rates on some investments are falling like autumn leaves, many dividend stocks expect to continue increasing their payouts. Enbridge (NYSE: ENB), Kinder Morgan (NYSE: KMI)And NextEra Energy (NYSE: NO) stand out from some Fool.com contributors for their ability to increase their dividends despite changing market conditions. This makes them ideal for those who want to receive more income in the future.
Enbridge is not sitting still
Ruben Gregg Brouwer (Enbridge): The big draw for most investors in midstream giant Enbridge will likely be the company’s significant 6.6% dividend yield. That’s reasonable, considering the dividend has been increased annually (in Canadian dollars) for 29 consecutive years. But Enbridge offers so much more than just a dividend.
A key part of the company’s approach is to adapt its portfolio to the changes taking shape in global energy demand. Therefore, the company’s portfolio includes oil pipelines, natural gas pipelines, natural gas utilities and renewable energy investments. Natural gas is expected to be an important transition fuel as the world shifts to cleaner alternatives, and renewable energy is the direction the world is moving. But oil is still important, allowing Enbridge to use its oil-related profits to increase its exposure to natural gas and build things like wind and solar farms.
The most recent transaction, in which three natural gas companies were purchased Dominion energyis a good example of the goal. Before the deal, Enbridge generated 57% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) from oil. After the deal it will only be 50%. As an added bonus, regulated natural gas companies have highly reliable, but slow, growth opportunities ahead. These activities, which expanded natural gas utilities from 12% of EBITDA to 22%, help strengthen Enbridge’s ability to achieve its long-term goal of 5% distributable cash flow growth.
Enbridge looks boring, but high returns backed by a slow and steady business becomes very exciting over time. Especially if the company deliberately adapts to the changing dynamics in the market it serves.
The fuel continues to rise
Matt DiLallo (KinderMorgan): Interest rates have been a headwind for Kinder Morgan in recent years. For example, the company noted in late 2022 that distributable cash flow would see a hit of $0.15 per share in 2023 due to the impact of higher interest rates. This is because a quarter of the debts have a variable interest rate, which means that the interest costs on these debts rise and fall with the interest rate.
Despite those headwinds, Kinder Morgan has continued to increase its high-yield dividend, which currently stands at more than 5%. Earlier this year, it achieved its seventh consecutive annual dividend increase.
With interest rates falling, Kinder Morgan will move from headwind to tailwind. Interest expenses on the company’s variable-rate debt should decline in the coming year. what will save the money. Meanwhile, lower interest rates will make it cheaper to refinance maturing debt and issue new debt to finance acquisitions as attractive opportunities arise.
Rates aren’t the company’s only tailwind. It responds to the growing demand for natural gas liquefied natural gas export facilities and utilities, with the latter positioning itself for a increase in electricity demand from AI data centers. Kinder Morgan has already lined up $5.2 billion in expansion projects to support this growing demand. That includes a $1.7 billion pipeline project to deliver more gas to utilities in the Southeast, which should come online in late 2028.
Kinder Morgan’s backlog gives the company great insight into its ability to grow its robust and stable cash flows. That rising cash flow should give the company enough fuel to continue raising its dividend in the coming years, even if interest rates rise to rise again.
Enough power to keep increasing the payout
Neha Chamaria (NextEra Energy): NextEra Energy owns the largest utility in the US, Florida Power & Light, and is also the world’s largest producer of wind and solar energy. The company relies heavily on debt to finance the growth of its utilities and renewable energy businesses, so falling interest rates should be good news for NextEra Energy shareholders in more ways than one, including dividends.
NextEra Energy has a strong dividend track record. Between 2003 and 2023, it increased its dividend at a compound annual growth rate (CAGR) of 10%, supported by around 9% CAGR in adjusted earnings per share (EPS). That dividend growth has generated significant returns for shareholders who have reinvested the dividends over the decades, and should continue to do so given NextEra Energy’s goals.
NextEra Energy targets 6% to 8% growth in adjusted earnings per share and average 10% growth in dividend per share through 2026, driven by cash flow growth for its growth investments in both businesses. For example, the company expects to invest $65 to $70 billion in renewables alone over the next four years. Lower interest rates should make growth financing cheaper for NextEra Energy and these investments should increase cash flows and support larger dividends. In short, this dividend stock with a 2.5% yield should continue to increase its dividend payout year after year.
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Matt DiLallo holds positions at Enbridge, Kinder Morgan and NextEra Energy. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Dominion Energy and Enbridge. The Motley Fool holds and recommends positions in Enbridge, Kinder Morgan, and NextEra Energy. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
Interest rates (and interest rates) are falling, but here are three dividends that should keep rising regardless of what was originally published by The Motley Fool
