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Two strong go-to dividend stocks for retirees are energy-industry bellwethers Enterprise Products Partners (NYSE: EPD) and ExxonMobil (NYSE: XOM). But they aren't the only options retirees should consider. Magellan Midstream Partners (NYSE: MMP) and Royal Dutch Shell (NYSE: RDS-B) have higher yields and very similar businesses. Here is what you need to know about Magellan and Shell if you're retired and looking to boost the income your portfolio generates.
1. Happily stuck in the middle
Enterprise is one of the largest midstream companies in North America, with a conservative management team and a yield of 6%. Magellan is roughly a quarter the size, but is even more conservative and offers a yield of 6.5%. Enterprise is a great option, but that extra 50 basis points from Magellan could be well worth dropping down to a smaller industry player.
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Like Enterprise, the bulk of Magellan's revenue comes from assets backed by fee-based contracts. That means its collection of pipelines and storage assets are largely protected from volatile energy prices, with demand for oil and natural gas (and the products they're made into) the bigger driver of performance. On that front, U.S. onshore production growth is outstriping midstream capacity, providing a solid runway for growth in the industry.
Magellan, meanwhile, has long taken a conservative approach with its balance sheet, with leverage at the low end of the industry. In fact, the partnership's debt-to-EBITDA ratio is lower than Enterprise's. Magellan has also long focused on self-funding its growth projects so it could minimize the number of dilutive shares it issues -- a business model to which Enterprise is only now shifting toward. Put simply, you will not be taking on extra financial risk going with Magellan.
What you will get, however, is a 50-basis-point boost in yield and an incredible distribution record. Magellan has upped its disbursement every quarter since it came public in 2001. Enterprise has a longer streak of annual distribution increases only because it has been around longer. Distribution coverage is 1.2 times, which is good for a partnership. And while that's lower than Enterprise, the difference is partly because of Enterprise's shifting business model (a transition that is still in progress).
MMP Financial Debt to EBITDA (TTM) data by YCharts.
Looking to the future, Magellan has roughly $1.25 billion in projects on tap for 2019 and 2020. It expects that to support distribution growth in the 5% range. That's a bit higher than what Enterprise is likely to provide (again because of its transition) and roughly in line with Enterprise's longer-term historical distribution growth rate. Magellan just nixed a large project, which is partly why the units are offering such a generous yield (historically it has yielded less than Enterprise). But management has a solid history of success and it deserves the benefit of the doubt right now since it is highly likely to find new ways to continue growing over time. If you are looking to maximize your income in retirement, Magellan is a great option today.