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3 Top Dividend Growth Stocks to Buy Now

By Matthew DiLallo – Dec 19, 2017 at 9:46AM

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These master limited partnerships expect to grow their payouts by at least a 15% annual rate over the next few years.

Companies that grow their dividends each year tend to outperform those that don't. That's why investors seeking income should focus their attention on dividend growth stocks instead of just looking at companies that pay a high current yield. That said, it is possible to have your cake and eat it, too, since some dividend payers offer an attractive current yield and compelling growth potential. Here are three top options to consider buying now.

Dividend Growth Stock

Current Yield

Dividend Growth Forecast

Antero Midstream Partners (AM 0.53%)

4.62%

28% to 30% annually through 2020

EQT Midstream Partners (EQM)

5.47%

15% to 20% annual growth

Noble Midstream Partners (NBLX)

3.79%

20% compound annual rate through 2020

Data source: Antero Midstream Partners, EQT Midstream Partners, and Noble Midstream Partners.

A hand placing a coin on a stack of coins.

Image source: Getty Images.

Top-tier growth

Antero Midstream Partners is a master limited partnership formed by natural gas producer Antero Resources (AR -2.63%) to support its growth. Its focus has been to build water supply pipelines and natural gas gathering lines so Antero can maintain a fast-paced drilling program. That relationship should continue being beneficial to both sides given that Antero is on pace to expand its production by a 20% compound annual growth rate through 2020, which will support Antero Midstream's ability to increase shareholder distributions by a top-tier 28% to 30% annual rate over that same time frame. 

What's even more impressive about Antero Midstream's growth prospects is that it can achieve that rapid pace while maintaining excellent financial metrics. In fact, it plans to keep its leverage ratio in the low 2.0 times range, which is well below the 4.0 times level where most MLPs feel comfortable. Furthermore, it expects to cover its distribution with cash flow by 1.25 times, which is a very healthy level for an MLP. That combination of top-tier distribution growth while maintaining a conservative financial profile could provide Antero Midstream with the fuel to outperform.

Visible dividend growth with upside

EQT Midstream recently announced that it could grow its payout by 15% to 20% annually for the next several years. Fueling that growth would be a combination of dropdown transactions from its parent company, EQT Corp. (EQT -3.83%), as well as organic growth projects EQT Midstream has underway. It could also achieve that excellent growth rate while maintaining conservative metrics, including covering its distribution with cash flow by more 1.1 times and targeting a leverage ratio of 3.5 times.

That said, EQT Corp. recently bought rival Rice Energy, which included a sizable stake in Rice Midstream Partners (NYSE: RMP). EQT is in the process of deciding what to do with that business and could choose to combine it with EQT Midstream. If it goes that route, then it's possible that EQT Midstream could grow its payout above the top end of its guidance range since Rice Midstream Partners can also increase its payout at a 15% to 20% annual rate on a stand-alone basis. That combination of a compelling current income stream with visible growth prospects, when combined with the potential catalyst of a merger with Rice Midstream, could fuel market-beating total returns for EQT Midstream investors in the coming years.

An oil and gas well in a field.

Image source: Getty Images.

The rookie sensation appears poised for another breakout

Noble Midstream Partners has been one of the best-performing MLPs of 2017, delivering a more than 40% total return in a year when most MLPs lost value. That marked an excellent debut for a company that came public in late 2016. Fueling its top-tier returns was the completion of several needle-moving acquisitions, including both dropdown deals from its parent, Noble Energy (NBL), as well as third-party transactions.

Noble Midstream, however, is just getting started. It holds the right of first refusal on several assets currently owned by Noble Energy, which it can acquire over the next few years. In addition, it can expand its recently acquired assets to drive incremental growth. Those two alone support Noble Midstream's belief that it can increase its payout by a 20% compound annual growth rate through 2020. The company can also achieve that impressive pace while maintaining a conservative coverage ratio of at least 1.3 times and a low leverage ratio of less than 2.5 times. That low-risk, high-rate growth could enable Noble Midstream to continue being one of the best-performing MLPs in the coming years.

The total package for income seekers

These three MLPs have everything a dividend growth investor could want since they're on pace to increase their already above-average payouts by more than 15% annually over the next few years. That said, what's even more impressive is that this trio can achieve that growth rate while maintaining conservative financial metrics, making it even more likely that they can sustain their payouts over the long term. That compelling combination could enable them to deliver market-beating total returns for investors in the coming years, which is why dividend growth seekers should take a closer look at these MLPs.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Antero Resources Stock Quote
Antero Resources
AR
$34.42 (-2.63%) $0.93
Noble Energy Stock Quote
Noble Energy
NBL
EQT Stock Quote
EQT
EQT
$39.93 (-3.83%) $-1.59
EQT Midstream Partners Stock Quote
EQT Midstream Partners
EQM
Antero Midstream Stock Quote
Antero Midstream
AM
$11.37 (0.53%) $0.06
Noble Midstream Partners LP Stock Quote
Noble Midstream Partners LP
NBLX

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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