Investors often focus on companies that are either growing at a high rate or pay a high-yielding dividend. That said, the sweet spot of investing includes the companies that increase their dividends each year. In fact, stocks that consistently grew their payouts outperformed both non-payers and those that only managed to maintain their dividends over a 40-year period, according to a study by Ned Davis Research.
Because dividend growers make great investments to hold for the long term, investors won't want to overlook any of these options. However, that's just what many have done with energy-related dividend growth stocks in recent years by completely avoiding the sector due to turbulent oil prices. That's causing them to miss out on great opportunities like Noble Midstream Partners (NBLX +0.00%), Dominion Energy Midstream Partners (NYSE: DM), and Valero Energy Partners (NYSE: VLP).
Fast-paced dividend growers like these tend to vastly outperform over the long term. Image source: Getty Images.
The noble performance in 2017 was just the beginning
Noble Midstream Partners was quietly one of the best-performing energy companies last year, crushing even the red-hot S&P 500. Fueling those gains were three acquisitions that enabled the company to increase its cash distribution to investors by 24% last year, pushing the yield up to 3.4%. That said, last year's strong showing was only the start of what's coming down the pipeline.
Those deals, as well as organic growth projects under way, position Noble Midstream to grow its cash flow at a rapid pace in the years ahead. That's because all of its assets generate predictable cash flow underpinned by fee-based contracts. Because of those agreements, the company expects to be able to increase its distribution to investors at a 20% annual pace through 2020. Meanwhile, future deals could allow the company to keep growing the payout at a healthy clip even further into the future since it has excellent financial metrics that support its ability to keep expanding.
Visible growth coming down the pipeline
Dominion Energy Midstream currently yields 4.1% after increasing its payout 22% last year. However, like Noble Midstream, there's plenty of growth still up ahead. In Dominion Midstream's case, it expects to increase its payout by a 22% compound annual growth rate through 2020.
Fueling that fast-growing income stream is the company's strategy to acquire several fee-based energy infrastructure assets from its parent company, Dominion Energy (D 2.14%), over the next few years. In fact, Dominion Energy Midstream owns the rights of first offer on three assets currently held by the utility, including Dominion's Cove Point LNG export terminal, its interest in a midstream system, and a major gas pipeline it's planning to build. As Dominion drops these assets down, it will provide Dominion Midstream with predictable streams of cash flow so it can continue boosting its payout at a rapid pace.
Image source: Getty Images.
A massive fuel tank for future growth
Valero Energy Partners' payout is up 25% over the past year and now yields 4.4%. Fueling that growth has been a steady diet of drop-down transactions with its parent, Valero Energy (VLO 6.61%). For example, in October, the refining giant sold some terminal assets as well as a pipeline to Valero Energy Partners for $508 million. The stable cash flow from those assets supports the company's ability to increase its payout another 20% this year.
That said, Valero currently owns assets generating about $1 billion in annual earnings that it could eventually drop down to Valero Energy Partners. That pool could fuel substantial growth for the company in the coming years since its current asset base produces around $315 million in annualized earnings.
Taking the right path to outperform
This trio of energy stocks not only have a history of growing their payouts, they have the fuel to continue increasing them at a brisk pace for years to come. That improves the odds that they could deliver market-beating returns over the long term. It's the type of opportunity no investor wants to overlook.
