ConocoPhillips (COP +1.57%) offers investors a slightly above-average dividend, currently yielding 2.4% versus 1.9% for the S&P 500. The oil and gas producer's payout appears to be on solid ground since the company can cover it along with the capital to maintain its current production rate as long as crude averages around $50 a barrel. Meanwhile, it has a solid balance sheet that's growing stronger, which gives the company the financial flexibility to maintain the payout even if crude prices drop below its cash flow breakeven level (as has been the case in recent weeks).
That said, while ConocoPhillips offers investors a decent payout, there are better options out there. Two that stand out due to their higher yields and more predictable cash flow streams are ONEOK (OKE +1.11%) and Medical Properties Trust (MPW 0.22%).
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Same industry without the outsized exposure to volatility
While ConocoPhillips pays an above-average dividend now, its payout used to be even more generous. However, the oil company slashed it last year due to persistently weak oil prices. Given its exposure to those volatile prices, it's possible that the oil giant might have to cut the payout again in the future if oil doesn't improve. That cash-flow variability, however, isn't a concern for energy midstream company ONEOK because 90% of its cash flow comes from fee-based contracts. Thanks to that focus on fees, ONEOK's earnings have steadily increased over the past five years despite a significant drop in oil prices because it has added new fee-based assets into the fold.
ONEOK expects to continue steadily growing cash flow in the years ahead by investing up to $2.5 billion on high-return fee-based projects. Those projects, which are in some of the fastest-growing shale plays in the country, should deliver robust cash flow growth over the next five years. Under ONEOK's current assumptions, it can increase the payout by 21% this year and then by 9% to 11% annually through 2021 while maintaining a conservative coverage ratio of 1.2. That is a pretty robust growth rate for a company that already yields 5%. When we add in the fact that ONEOK has a solid balance sheet with improving credit metrics, it makes this stock look like a gold mine for income investors.
Earn a healthy dividend from this option
Medical Properties Trust also collects a steady income stream. However, instead of getting paid a fee for services associated with pipelines and processing plants, the real estate investment trust (REIT) leases hospital-related real estate to healthcare operating companies under long-term contracts. Those contracts supply the company with predictable cash flow, which it grows by buying and building additional properties.
For example, earlier this year the company bought 10 hospitals and one behavioral health facility for $1.4 billion, in a deal that will immediately boost funds from operations (FFO) by $0.10 per share, which is a high-single-digit increase. A steady stream of transactions like this one drove 10% annual growth in FFO per share since 2013, which outperformed the 6.7% annual growth in FFO per share from its peer group. That expansion enabled Medical Properties Trust to deliver 4% annual dividend growth, which again outperformed its peer group, even as it strengthened its coverage ratio from 83% to 70%. Meanwhile, it achieved that growth by improving its balance sheet to the point where it now has sector-leading leverage metrics. Even with that healthy financial profile, Medical Properties Trust offers a very compelling current yield of 7.3%. Furthermore, given the strength of its coverage and leverage ratios these days, future dividend growth could accelerate from its previous pace, which makes this an excellent stock for investors looking for a healthy dose of income and growth.
Investor takeaway
While ConocoPhillips is a great company that offers a solid payout from the oil and gas sector, there are better options out there for income-focused investors. On yield alone, ONEOK and Medical Properties Trust are better than ConocoPhillips by a country mile. The two take that a step further by backing their larger income streams with robust coverage metrics, strong balance sheets, and clear growth prospects. It's a combination that ConocoPhillips just can't match given its exposure to volatile oil prices.
