Yield-seeking investors often feel they need to take on more risk to score a bigger payout. However, not all high-yield dividend stocks carry high levels of risk. Some entities, for example, have above-average yields because they must pay out a larger portion of their cash flow to satisfy an Internal Revenue Service requirement.
One such vehicle is master limited partnerships (MLPs), which don't have to pay corporate income taxes as long as they pass virtually all their taxable income on to investors. Because of that, most MLPs pay generous high-yielding distributions. That's certainly the case with midstream energy companies Enterprise Products Partners (NYSE: EPD), Crestwood Equity Partners (NYSE: CEQP), and MPLX (NYSE: MPLX), which all yield more than 6%.
A high yield with a decent growth rate
Enterprise Products Partners is one of the largest midstream companies in North America. The MLP operates more than 49,000 miles of oil and gas pipelines as well as storage, processing, and export facilities. Customers typically sign long-term, fee-based contracts to use the capacity of Enterprise's assets, which provides the company with a steady stream of cash flow. The MLP currently distributes about 60% of that money to investors in support of a payout that yields 6%.
Enterprise Products Partners uses the rest of that money, as well as its top-tier balance sheet, to expand its midstream footprint. The MLP currently has $5 billion of growth projects under construction, which will grow its cash flow at a moderate pace over the next few years. That should enable the company to continue increasing its high-yielding distribution, which it has done in each of the last 59 straight quarters.
A high yield with a high growth rate
Crestwood Equity Partners is a much smaller MLP that primarily focuses on gathering and processing natural gas. Those operations, however, provides the company with stable cash flow backed primarily by fee-based contracts. That enables the company to pay out an attractive distribution, which currently yields 6.8%.
Aside from that high yield, the other attraction with Crestwood Equity Partners is its growth prospects. The midstream company recently made a needle-moving acquisition, which will accelerate its growth profile. That transaction enabled it to take full control of one of its fastest-growing assets and now has the company on track to expand cash flow per share at a more than 20% compound annual rate through 2020. That's the fastest growth rate in its peer group, which makes Crestwood an ideal option for investors who want both a high yield and a rapid growth rate.
An ultra high yield with ample growth prospects
MPLX has grown into a large-scale MLP over the years through a combination of acquisitions and expansion projects. The company is in the process of completing another needle-moving transaction that will broaden its midstream footprint and enhance its growth prospects. Furthermore, the deal will supply the company with even more cash to support its 8.4%-yielding distribution to investors.
MPLX should have the fuel to continue increasing that payout in the coming years. Driving that view is the growing backlog of expansion projects MPLX has underway. The MLP has several pipelines, processing, storage, and export projects under construction and recently agreed to invest in a large-scale oil pipeline project and approved a new gas pipeline project. As these assets enter service over the next few years, they should supply MPLX with enough incremental cash flow to continue increasing its payout at a healthy pace. That would enable the company to maintain its current streak of boosting its distribution, which recently reached 25 consecutive quarters.
Three excellent income options
These three MLPs generate gobs of cash flow as oil and gas pass through their midstream assets. That gives them the money not only to pay high-yielding dividends but invest in expanding their operations. That combination of growth and income could enable investors to earn strong total returns, which is what makes these high-yield stocks such attractive buys these days.
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