Dividend-paying stocks have historically outperformed the market, as those payments help boost total returns. Companies with above-average payouts, in particular, tend to outperform other dividend-paying stocks on a more frequent basis. However, the best performance has been from companies that increase their dividends, which is why investors should seek out stocks that not only offer an above-average payout but can grow it over time.
Three stocks that easily meet the first criteria are energy infrastructure companies Plains All American Pipeline (NYSE: PAA), Crestwood Equity Partners (NYSE: CEQP), and CorEnegy Infrastructure Trust (NYSE: CORR), since all currently yield more than 5%. While that trio hasn't given their investors a raise in years, that could change in 2019. If that occurs, it could provide these energy companies with the fuel to produce market-beating total returns.
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Planning on a pay raise
Plains All American Pipeline, like many energy companies, reduced its high-yielding payout in recent years so that it could retain more cash and firm up its financial situation. The company made the first cut in late 2016, followed it up with another one a year later, and has held the payout flat at that level for the past several quarters. These decisions, while painful for investors at the time, have started paying off. Plains All American's leverage ratio has improved from a concerning 5.6 times in the third quarter of 2017 to a much better four times in the third quarter of last year. That's within striking distance of the company's 3.5 to four times target range, which it expects to achieve during the first half of 2019.
Once Plains All American hits that inflection point, the company anticipates that it will be able to start increasing its 5.2%-yielding distribution once again. The oil pipeline company could potentially announce an increase as early as May. It will consider whether to provide one bigger annual increase or to raise its payout by smaller increments each quarter. Once the company restarts distribution growth, it could continue to give its investors steady raises, as it has a growing backlog of oil pipeline expansion projects in development that has the potential to significantly increase its cash flow in the future.
Hitting the accelerator
Crestwood Equity Partners reduced its distribution to investors in early 2016 so that it could retain cash and improve its financial profile, and it has held the level flat since that time. That turnaround strategy has helped reduce the company's leverage ratio from an elevated 4.8 times in 2015 down to 4.2 times in late 2018 while also providing it with cash to help fund growth projects. Those expansions have already started boosting the company's bottom line and have it on pace to grow cash flow per share at a 15% compound annual growth rate through 2020.
Crestwood has several options for this rising stream of cash flow, including investing in additional growth projects, initiating a repurchase program, and increasing its 7.4%-yielding payout. That latter option, however, seems likely given the comments made by CFO Robert Halpin on the company's most recent quarterly conference call, during which he stated that "I think we would probably lean toward some appropriate and modest amount of distribution [increase]."
Waiting around for the right deal
CorEnergy Infrastructure Trust currently offers the highest-yielding payout in this group at 8.4%. One reason it has a higher yield is that the company didn't reduce its dividend during the oil market downturn even though two of its key customers went bankrupt. That situation still forced it to be more fiscally conservative, which prevented it from making any growth-focused acquisitions. As a result, CorEnergy hasn't increased its dividend since late 2015.
However, with market conditions improving last year, CorEnergy has been on the hunt for deals. The company has a solid balance sheet because it has been using retained cash to pay down debt, which has improved its financial flexibility. On top of that, CorEnergy recently sold an asset and expects to redeploy those proceeds into a new one this year. As the company uses its financial flexibility to make acquisitions that increase cash flow, its dividend should follow suit.
Patience could finally start paying off
After holding their payouts flat in recent years, this trio of energy infrastructure specialists could finally give their investors well-deserved raises in 2019. That would be a big step forward for these companies as they seek to bounce back from the challenges of the past several years. The key, however, will be whether they can continue increasing their payouts on a consistent basis going forward, since that could give these energy stocks the fuel to outperform the market.
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Matthew DiLallo owns shares of CorEnergy Infrastructure Trust and Crestwood Equity Partners LP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.