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The Top-Notch High-Yield Stock Many Investors Seem to Overlook

Matthew DiLallo, The Motley Fool

Natural gas pipeline MLP Spectra Energy Partners (NYSE: SEP) has quietly produced excellent results for income investors over the years. Just last month, for example, the company announced its 41st consecutive distribution increase. With that raise, the company now yields an attractive 7.4%.

However, despite that outstanding history of delivering steady income growth for investors, the company has spent much of its existence in the shadows. First, because it was an underling of Spectra Energy and more recently as one of several master limited partnerships controlled by Canadian energy infrastructure giant Enbridge (NYSE: ENB), which bought its former parent last year. That relationship with Enbridge will likely cause many investors to continue overlooking Spectra Energy Partners' potential, which is a shame given the lucrative income stream it throws off each year.

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Spectra Energy Partners 101

Spectra Energy formed Spectra Energy Partners more than a decade ago to grow its oil and gas pipeline business. It has done just that over the years, becoming one of the largest pipeline MLPs in the country, operating more than 15,000 miles of gas pipelines as well as some oil lines and storage assets, which combined to produce more than $1.5 billion in cash flow last year. That was enough money to cover the company's high-yielding payout by a comfortable 1.2 times. Add in the fact that Spectra Energy Partners has a solid investment grade balance sheet backed by a low leverage ratio, and its distribution is on solid ground.

While Enbridge acquired Spectra Energy Partners' former parent last year, it doesn't expect to make any changes to the MLP's focus, which will remain primarily on owning and operating U.S. natural gas pipelines. Instead, the only change has been the elimination of its costly management fees in a transaction completed earlier this year. That deal should lower Spectra's cost of capital, making it cheaper for the company to build or buy assets in the coming years.

An uncovered pipeline construction site with sand around it.

Image source: Getty Images.

What's coming down the pipeline

With that simplification transaction now in the rearview mirror, Spectra Energy Partners' focus going forward will be on expanding its pipeline network. The company currently has $2.5 billion of expansion projects under way, with $2 billion of them expected to enter service this year, led by the $1.3 billion Nexus pipeline. Those growth projects should boost cash flow up to $1.8 billion by 2020, providing the company with the money to steadily increase its distribution. In fact, it plans on raising the payout 7% this year and at a 4% to 6% rate through 2020 while maintaining a conservative 1.1 to 1.2 coverage ratio.

That said, Spectra Energy Partners could potentially grow the payout at an even faster rate if it secures additional projects. One area of focus is in New England, where the company noted in its last earnings release that "natural gas pipeline capacity scarcity and system reliability remains a primary issue." The company is exploring solutions for the region and could invest $1 billion to $3 billion in projects over the next five years. The company also has development opportunities in the southeast and Gulf Coast to expand its gas pipeline network, which could yield $3 billion to as much as $6 billion in future projects.

In addition to these organic expansion opportunities, Spectra Energy Partners could also acquire assets from Enbridge or third-parties in the coming years. Enbridge, for example, owns several gas pipelines in the U.S. that it could eventually drop down to Spectra Energy Partners to free up capital for other growth projects. Meanwhile, Spectra Energy Partners could look outside the organization and acquire rivals, assets, or stakes in expansion projects to boost growth in the coming years.

One of the most compelling times to consider buying in years

Thanks to its most recent distribution increase, and a double-digit dip in value over the past few months, Spectra Energy Partners currently trades at its most compelling level in years. In fact, its yield hasn't been this high since the end of 2015 when the oil market was going haywire. That suggests now is one of the better times to considering buying Spectra Energy Partners to lock in a lucrative distribution that should continue increasing at a mid-single-digit rate over the next few years. That income with upside could potentially fuel market-beating returns for investors from here.

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Matthew DiLallo owns shares of Enbridge. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Spectra Energy Partners. The Motley Fool has a disclosure policy.