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Defensive stocks pay solid dividends. Bank of America likes these names
Data center power demand could boost companies with ties to transporting and storing natural gas – and that bodes well for a few stocks that also happen to pay attractive dividends, according to Bank of America. “In this environment, we favor gas-linked names, especially midstream ones,” said analyst Jean Ann Salisbury in an Oct. 17 report. The natural gas liquids midstream space is “relatively defensive,” she added. “Near-term gas oversupply is obscuring the brightening medium-term picture; we expect positive catalysts in 2025 as data center development and LNG demand materialize,” the analyst said, referring to liquified natural gas. She added that the Street isn’t fully appreciating the companies potential to generate free cash flow. Here are a few of the stocks that Salisbury’s team highlighted with buy recommendations. Enterprise Products Partners LP made the cut. Bank of America’s price target of $35 suggests 20% upside from Tuesday’s close. The bank said that Enterprise Products can maintain its market share in Permian natural gas liquids growth and that it has added “much needed” [liquified petroleum gas]/ethane export capacity. “If capex slows at the end of this buildout (which it should), potential cash flow payout is enormous at $3.3+/share,” Salisbury’s team said, adding that the company has already paid down debt to the low end of its peers. Enterprise Products is generally well-liked across Wall Street, with 17 out of 19 analysts covering the name rating it a buy or strong buy, according to LSEG. Shares are up 9.5% in 2024, and it offers a dividend yield of 7.3%. Enterprise Products also happens to be a limited partnership, which offers it a special tax treatment that permits it to provide sweet yields. Master limited partnerships aren’t subject to federal income taxes, but the limited partners – the investors – in them are responsible for taxes on the income that’s distributed. That’s different from the tax treatment for C-corporations, where the business is on the hook for corporate income taxes and shareholders pay levies on dividends received. Because of that preferential tax treatment, these partnerships can offer higher yields. Less positively, investors in these partnerships also typically receive a Schedule K-1 detailing the income they received, which can make tax filing season complicated. Energy Transfer LP is another buy-rated pipeline name on Bank of America’s list. The firm’s price target of $20 implies 22% upside from Tuesday’s close. Shares are up 18% in 2024, and the stock offers a dividend yield of 7.8%. It’s also a limited partnership. “Even in softening oil environment, still surprisingly cheap compared to how much cash could be paid out if capex/acquisitions ever slow even a little bit,” Salisbury’s team noted. The bank also highlighted Energy Transfer’s “solid base portfolio with singular assets in many places, growing with NGL/crude production at low single digits with low capex required,” referring to natural gas liquids. Energy Transfer is also developing a liquified natural gas export facility in Lake Charles, Louisiana, which could provide upside if the project moves forward, Salisbury’s team said. Wall Street is also a fan of Energy Transfer, with 94% of the analysts covering the stock rating it a buy or strong buy, per LSEG. Finally, Bank of America called out Kinder Morgan , saying it’s among the “key beneficiaries of long-term U.S. gas demand inflection in 2025.” With a price target of $27, the investment bank sees nearly 9% upside from Tuesday’s close. Shares are up nearly 40% this year, and the stock has a dividend yield of 4.7%. As gas demand rises, Bank of America sees a positive catalyst for brownfield gas pipelines – as in, pipelines that are already part of an existing facility, rather than those that are newly built. “We anticipate that in 2025 both KMI and [ Williams Companies ] will announce several attractive projects that will spur building to new demand in the Arizona/TX/Midwest region (for KMI) and the East Coast or Pacific Northwest (for WMB),” Bank of America said.
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