Most investors have probably heard of energy giants Royal Dutch Shell (RDS.A) (RDS.B), BP (BP -0.38%), and Hess (HES 0.67%). Far fewer, however, have probably heard of their master limited partnerships (MLPs). If so, they're missing out on some amazing dividends that are not only high-yielding but also fast-growing.
Taking things up another notch
Royal Dutch Shell is one of the highest-yielding dividend stocks in the oil patch, with its payout currently up to 6.4%. However, as attractive as that might be, its MLP, Shell Midstream Partners (SHLX), is even better with a current yield of 8.9%.
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However, as enticing as that might be, what makes Shell Midstream's payout stand out is its high-octane growth rate. It has increased the payout every quarter since its formation in 2014, growing it by an impressive 16.5% over the past year. The MLP currently generates enough cash to cover that payout by 1.1 times and has a low leverage ratio of 3.6 times debt-to-EBITDA. While coverage is a bit below the 1.2 target of most MLPs, leverage is well within the less than 4.0 safe zone. That means the payout is on fairly solid ground.
Meanwhile, it has plenty of fuel to continue increasing its payout by acquiring more of Shell's midstream assets as well as expanding its existing ones. The two companies recently teamed up on an $800 million deal whereby Shell Midstream acquired stakes in two pipelines from its parent. It also plans to expand its Mars pipeline in the Gulf of Mexico to support a recent Shell discovery. That relationship should enable the MLP to continue growing its high-yielding payout in the coming years.
High-octane growth ahead
BP Midstream (BPMP) shares many similarities with Shell Midstream, including an 8.9%-yielding distribution, well above the 6.4% payout of its oil-producing parent. It's also growing its distribution at a fast pace -- it's risen 11.3% so far this year, which keeps it on target to boost it by a mid-teens rate in 2019.
The company's payout is on a slightly firmer foundation, since BP Midstream covered it with cash flow by 1.25 times during the third quarter. Meanwhile, it has a lower leverage ratio of about 2.3 times debt to EBITDA. That means it has plenty of financial flexibility to keep making acquisitions from BP.
BP Midstream currently has enough fuel to grow its payout by another 5% to 6% next year without making another acquisition, driven by rising volumes and rates on its existing systems. However, given its healthy financial profile, it can afford to complete another drop-down transaction with its parent. Doing so could give it enough fuel to deliver mid-teens distribution growth again next year.
Big-time growth ahead
Hess' dividend doesn't match that of its big oil peers, given its much lower 1.5% yield. Its MLP, Hess Midstream Partners (HESM), is therefore a much more attractive option for income seekers, with its 8.1% yield. It's also growing its payout, which is something Hess hasn't done in years. In the MLP's case, it's payout is up 15% in the past year alone.
Hess Midstream expects to maintain that growth rate through at least 2021. Two factors drive that view. First, Hess' production is growing fast, which is driving additional volumes on Hess Midstream's systems. In addition, Hess Midstream recently acquired the rest of Hess' onshore infrastructure, which will provide a meaningful boost to its cash flow per share. That deal will also enhance the company's financial metrics, as it expects greater than 1.2 times distribution coverage along with conservative leverage of 3.0. Hess Midstream's dividend growth forecast looks solid.
Overshadowed by their parents
While Shell, BP, and Hess are household names, their high-yielding MLPs are virtually unknown among investors. They've been missing out on not only their bigger payouts but also their big-time growth. With more growth on the way, dividend investors won't want to continue overlooking this high-yielding trio.
