Higher-yielding dividend stocks are often higher-risk investments. Those bigger payouts offer investors tempting potential rewards for putting their money into a company with a higher risk profile.
However, some high-yield stocks provide investors with the best of both worlds -- low-risk, high-yielding payouts. Energy Transfer(NYSE: ET), Enterprise Products Partners(NYSE: EPD), and MPLX(NYSE: MPLX) are in that group. Because of that, these master limited partnerships (MLPs) can help investors energize their income streams.
Clearly visible income growth ahead
At its current share price, Energy Transfer's dividend yields 8.7%. That's more than 6 times the S&P 500's roughly 1.4% dividend yield.
That monster payout is on a firm foundation. Energy Transfer generates about $7.5 billion in annual distributable cash flow. The MLP's cash flow is stable, with about 90% coming from fee-based sources like long-term contracts and cost-of-service agreements. Meanwhile, the company disburses a conservative amount of that cash flow to investors in distributions (roughly 53%). It retains the rest to fund expansion projects, strengthen its balance sheet, and repurchase units (shares).
The company has set a target of investing about $2 billion to $3 billion annually in expansion projects. That investment level enables it to produce lots of excess free cash flow to maintain a strong balance sheet. It currently expects its leverage ratio to be at the low end of its 4.0 to 4.5 target range in the future. That gives it the flexibility to make value-enhancing acquisitions as opportunities arise. (It made two deals last year.)
Energy Transfer's durable and growing cash flow positions it to keep increasing its already massive distribution. It has grown its payout by 3.3% over the past year, in line with its long-term target of growing its distribution at a 3% to 5% annual rate.
Building on its legacy
Enterprise Products Partners reached a milestone in 2023: That was its 25th straight year of distribution growth. It didn't waste any time extending that streak this year. It raised its payment by another 3% in January and has increased the payout by 5.1% over the past year. At the current share price, its yield is 7.6%.
The MLP should have plenty of fuel to continue increasing its sizable payout. It has generated about $8 billion in adjusted cash flow from operations over the past year, and distributed 53% of that to investors. That enabled it to retain all the money it needed to fund its expansion projects with room to spare. This excess cash allowed the MLP to strengthen its elite balance sheet. It has a low leverage ratio of 3.0 and the highest credit rating in the midstream industry.
The company has $6.8 billion of major growth projects currently under construction. It expects to fund $3 billion to $3.5 billion of growth capital projects this year. Those projects will increase its cash flow, giving it more fuel to raise its distributions.
High yield and high growth
MLPX is a bit of an outlier among high-yielding stocks. It offers a muscular payout (currently yielding 8.8%). Meanwhile, it has increased its distribution by 10% in each of the last two years.
The MLP is growing at a solid clip. Its earnings jumped nearly 9% last year, while its cash flow rose by more than 7%. It produced enough cash to cover its payout 1.6 times -- a comfortable margin. What was left was more than enough to fund its expansion projects, so it was able to add more cash to its fortress-like balance sheet. MPLX ended 2023 with $1 billion in cash and a leverage ratio of 3.3, well below the 4.0 its stable business can support.
The company recently took advantage of its financial strength to make a small acquisition -- it paid $270 million to buy out its partner's interest in their gathering and processing joint venture in the Permian. That deal will supply it with some incremental cash flow this year. The MLP will also get a cash flow boost from expansion projects. It expects to finish a few more this year and has a couple of projects slated to enter service next year. These investments will grow its cash flow, giving MPLX more fuel to increase its payout.
Supercharge your income production
Energy Transfer, Enterprise Products Partners, and MPLX generate lots of steady cash flow as they transport, process, and store oil and natural gas. They pay out reasonable portions of that money to investors via high-yielding distributions, but retain some cash to fund their growth and maintain strong balance sheets. Because of that, they're ideal options for investors seeking sizable and sustainable income streams that should continue growing.
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Matthew DiLallo has positions in Energy Transfer and Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
