Companies that give their investors a raise each year have consistently outperformed the broader stock market. Using data dating back to 1972, companies that initiated or grew their dividends generated an average total annual return of 10.1% versus 7.7% for the S&P 500, according to a study by Ned Davis Research. Given that history, investors should zero in on dividend growth stocks since they have a higher probability of outperforming both non-payers and non-growers.
Two great dividend growth stocks to consider are Antero Midstream Partners (AM 1.03%) and Noble Midstream Partners (NBLX). These two pipeline companies are on pace to double their dividend rates over the next five years. That high-octane dividend growth, when combined with their high yields, could give them the fuel to significantly outpace the market in the coming years.
Image source: Getty Images.
Sector-leading dividend growth
Antero Midstream Partners offers income investors the best of both worlds in that it pays a high yield that it expects to grow at a high rate for the next several years. The natural gas gathering and processing MLP currently yields 5.6%, which is well above the 1.8% average of stocks in the S&P 500. However, as good as that payout is right now, it will be even better in five years. That's because Antero expects to increase it at a 28% to 30% annual pace through 2020, and then grow it at a 20% annual rate in 2021 and 2022. That puts the company on track to double its current distribution by 2021:
|
Metric |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|---|
|
Annual distribution |
$1.33 |
$1.71 |
$2.20 |
$2.84 |
$3.41 |
$4.10 |
Data source: Antero Midstream Partners and the author's calculations. Note: Assumes 29% growth in 2018 through 2020.
Fueling Antero Midstream's high-octane income growth are the investments needed to support the expansion plan of its gas-producing parent, Antero Resources (AR 0.69%). The company currently expects to grow its production at a 15% compound annual rate through 2022. To facilitate that expansion, Antero needs Antero Midstream to build new gathering pipelines and processing capacity to move this production from the wellhead to the nation's pipeline network. Antero Midstream expects to invest $2.7 billion over the next five years to support these rapidly expanding volumes, with those expansions providing it with the cash flow needed to fuel its big-time distribution growth plan.
Image source: Getty Images.
Second-best is still pretty good
Noble Midstream Partners has lots in common with Antero Midstream. It's also an MLP that's focused on supporting the growth of its producing parent, in this case, Noble Energy (NBL). It will do that by constructing new oil and gas gathering pipelines and processing facilities to handle Noble's fast-growing volumes from the Permian Basin and DJ Basin.
In addition to supporting the growth of its parent, Noble Midstream made an acquisition last year to add a third-party supported system to its network, which not only diversified its customer base, but enhanced its growth prospects. As a result, the company expects to increase its 6.2%-yielding payout at a 20% compound annual growth rate through 2022, which is the second best in the MLP sector. That puts it on pace to double its current payout rate within five years:
|
Metric |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|---|
|
Annual distribution |
$1.79 |
$2.15 |
$2.58 |
$3.10 |
$3.72 |
$4.46 |
Data source: Noble Midstream Partners and author's calculations.
Noble Midstream has everything it needs to achieve that plan since it can organically expand its footprint and grow its cash flow to support that forecast. However, the company has some additional fuel in reserve just in case. For example, Noble Midstream holds the option to acquire a stake in a natural gas liquids pipeline. In addition to that, it can acquire additional midstream assets owned by Noble Energy. Add that visible growth to the fact that the company has a strong financial profile, and it should have no trouble doubling its payout in five years.
Great income now, with much more later
What sets this duo apart from most dividend growth stocks is that they're starting off with an already high yield. Because of that, income investors stand to collect a gusher of cash flow from these companies over the next five years. That combination of a high yield and a high growth rate should give both MLPs the fuel to potentially deliver market-smashing total returns from here.
