2 Hot Dividend Stocks to Buy Today

America's energy boom keeps getting bigger, with new records constantly being set and broken. IHS Global predicts that the US will require $890 billion in new energy investment to keep up with the record amount of oil and gas production. This article highlights two of the best high-yielding companies poised to grow rich from this megatrend and take investors along for the ride.

Jul 14, 2014 at 3:33PM

In the first quarter of 2014 America smashed through its previous oil production record of 9.7 million barrels/day (bpd), set in 1970, to achieve a staggering 11 million bpd and become the world's largest oil producer. 

The Energy Information Administration (EIA) predicts US gas production will increase 56% by 2040. 

Shale formations such as the Marcellus and Utica are expected to increase their production 34-fold between 2007 and 2035. 

IHS Global, a leading information and analytics company, believes that by 2026 the US will require $890 billion in additional energy investment, in things like new pipelines, storage, and processing facilities. They estimate this will create as many as 1.1 million jobs and add $120 billion/year to the economy, resulting in a 0.71% increase in the GDP growth rate.

With such staggering sums bandied about investors need to know where they can invest to profit from this historical bonanza. This article outlines two excellent pipeline MLPs that are poised to make long-term investors exceedingly rich in the years to come. 

Note, these two MLPs pay distributions, not dividends. The difference is that distributions are tax deferred and require a K-1 form instead of a 1099 form. They can cause tax headaches when held in tax deferred accounts such as IRAs.  

MLP Yield 10 Year Projected Annual Earnings Growth 10 Year Projected Distribution Growth 10 Year Projected Annual Total Returns
Magellan Midstream Partners 3% 14.10% 14.29% 11.10%
MarkWest Energy Partners 5.10% 62.20% 37.50% 67.10%

Sources: S&P Capital IQ, Yahoo! Finance

Magellan Midstream Partners (NYSE:MMP) and MarkWest Energy Partners (NYSE:MWE) have both handily outperformed the market in the last 13 years, with Magellan Midstream being one of the best investments of the last decade. 

MMP Total Return Price Chart

MMP Total Return Price data by YCharts

There is good reason for this outperformance, and strong growth catalysts for Magellan Midstream to continue beating the market over the next decade, although not to the previous extent. 

The case for Magellan Midstream Partners 
Magellan Midstream Partners is the largest refined fuels pipeline operator in America, with 9,500 miles and 54 distribution terminals.

The key to Magellan Midstream's success has been its cost structure and management. For example, Magellan Midstream bought out its general partner in 2009, at the peak of the financial crisis, for just eight times earnings before interest, taxes, depreciation, and amortization (EBITDA). This removed its incentive distribution rights and lowered its cost structure substantially, allowing it to grow its distributions by 13% annually for 13 years.

Magellan Midstream's management is one of the best at taking advantage of opportunistic acquisitions. In 2010 after the BP oil spill, BP was forced to sell assets -- Magellan acquired $289 million worth of oil storage and petroleum pipelines for just 8-9 times EBITDA.

Over the last decade Magellan Midstream has shown the same knack for deals, executing $3.7 billion in accretive acquisitions and organic investments. 

Nearly all of Magellan's acquisitions and projects pay for themselves in 3-10 years. Two examples of Magellan's disciplined investment approach are its Longhorn and Double Eagle pipelines.

The Longhorn pipeline is an oil pipeline from the Permian Basin to Houston. Its expansion increases its capacity by 50,000 bpd, costs $430 million, but will pay for itself in only three years. It comes online in early 2015. 

The Double Eagle pipeline is a joint venture with Kinder Morgan that will transport 100,000 bpd of condensates from the Eagle Ford shale to Magellan's Corpus Christi condensate splitter, which will have a capacity of 50,000 bpd of condensate. It will cost $250 million, allow for exports of ultra-light crude, and pay for itself in just six years.

Interested investors should dollar-cost average into Magellan Midstream due to its current valuation, a well deserved but lofty 23 times cash flows -- double its historical average.

MarkWest Energy Partners: pipeline king of the Marcellus shale
MarkWest Energy Partners is the leading pipeline provider for the Marcellus, Utica, and Haynessville shales. The Haynesville shale is set to supply the coming LNG export boom along the Gulf Coast.

In the Marcellus MarkWest operates 73% of gas processing capacity with plans to expand by 62% by 2015.  In the Utica shale Markwest operates 43% of processing capacity with plans to double its capacity by 2015. In total MarkWest Energy Partners plans to open 11 new processing plants within the next 18 months, bringing its total processing capacity across its entire network to 7 billion cubic feet/day, a seven-fold increase in just 10 years.
 
MarkWest is also investing heavily into natural gas liquids (NGLs), whose production is projected to increase 60% over the next decade to over 1 million bpd. MarkWest is partnering with Targa ResourcesSunoco, and Kinder Morgan to construct sufficient NGL pipelines to take advantage of this $176 billion megatrend.
 
The sum total of its expansion efforts is that MarkWest is guiding for 30+% growth in distributable cash flow this year, with distribution growth of 7% in 2014, 10% in 2015, and accelerating in years to come. 

Foolish takeaway
America's energy boom is a multi-generational affair that will enrich investors in MLPs such as Magellan Midstream Partners and MarkWest Energy Partners for decades to come. Long-term income investors are likely to do exceptionally well owning both, though Magellan Midstream Partners should be dollar-cost averaged due to its high valuation. 
 

Top dividend stocks for the next decade
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Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Magellan Midstream Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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