Income-seeking investors tend to focus their search on companies with high yields because they're looking to maximize current cash flow. For those who don't need the money right now, a better approach is to look for investments with income growth potential. While that means collecting less cash in the near term, it should enable an investor to pull in much more money in the future.

That's abundantly clear when looking at the distribution growth forecast at Antero Midstream Partners (NYSE:AM). While some income-seekers might not be all that excited by the pipeline and processing master limited partnership's current 5.5%-yielding distribution, few would scoff at the chance to collect a 15.5% yield in just five years. 

A hand putting another coin on a growing pile in the soil, with a green sprout coming out of the stack and the sun shining in the background.

Image source: Getty Images.

Examining the math

Earlier this year, Antero Midstream Partners unveiled its 2018 guidance and long-term targets. The company anticipates investing $2.7 billion over the next five years in building natural gas pipelines and related infrastructure to support the planned production growth of its parent, Antero Resources (NYSE:AR). Given the high returns Antero Midstream can earn on those capital projects, it expects cash flow to grow enough to support 28%-30% annual distribution growth from 2018 to 2020 and 20% increases in 2021 and 2022.

To put numbers behind that forecast, Antero sees its payout rising from last year's rate of $1.325 per unit up to about $4.10 per unit in 2022. With units recently selling for around $26.50 apiece, it implies that investors who buy around that price could collect a 15.5% yield on that investment in 2022. Here's a look at what investors could earn with various initial investments:

Number of Shares Purchased @$26.50

Total Initial Investment

Potential Income in 2018

Potential Income in 2019

Potential Income in 2020

Potential Income in 2021

Potential Income in 2022

Potential five-year cumulative income

































Data sources: Antero Midstream investor presentation and author's calculations.

Just to pull out one example from that table, buying 250 shares today for an initial outlay of around $6,600 could yield about $430 in income this year. However, given Antero's growth forecast, that annual cash flow stream could rise to more than $1,000 by 2022. That sets investors up to potentially generate more than $3,500 of cash in the next five years.

A calculator and pen on top of $100 bills.

Image source: Getty Images.

Metrics to back everything up

As with any long-term forecast, there are risks that Antero's won't come to pass. However, the company has several factors in its favor that increase the likelihood it can meet and potentially even exceed that outlook. First, Antero Midstream has rock-solid financials backed by a low leverage ratio that should average between 2.0 to 2.5 over that timeframe, which is well below the 4.0 comfort level of most MLPs. That's why the company recently received a credit rating upgrade to investment grade. Meanwhile, the company expects to generate enough cash to cover its distribution by a conservative 1.25 times through 2020 and a still comfortable 1.1 times after that.

That solid financial foundation reduces the risk that Antero won't have the financial resources to meet all its objectives. Further muting the potential for a shortfall is that the company isn't relying on any external factors to drive its forecast. For example, its parent company, Antero Resources, recently hit an inflection point where it can fund its growth plan within cash flow at current commodity prices with plenty of room to spare. In fact, Antero Resources is on pace to generate more than $1 billion in free cash over the next five years, which it could use to repurchase its cheap stock or pay dividends. Meanwhile, with a conservative coverage ratio, Antero Midstream is generating excess cash above its current distribution to help finance expansion projects. The company expects to fund the balance by using its balance sheet flexibility, including borrowings under its credit facility.

Because the company isn't relying on any external factors to drive growth, there is some untapped upside potential. For example, Antero Midstream has identified more than $1 billion of potential external expansion opportunities further downstream from its current focus areas that it could invest in over the coming years. In addition to that, the company could make opportunistic acquisitions to expand its reach even further. If the company is successful in capturing some of those outside opportunities, it will enhance its distribution growth outlook.

Don't overlook the potential

While Antero's current yield might not impress all income seekers, it offers eye-popping growth potential that could enable investors to collect a much bigger income stream in the next few years. It backs that forecast with a clear plan to get there and rock-solid financial metrics. That's why it's one stock that income investors won't want to miss.

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.