Seadrill Partners (NYSE:SDLP) currently pays out a whopper of a dividend as shares of the offshore driller yield more than 14%. However, as attractive as that payout might seem, there's a reason it's in the double digits. For starters, the company is quickly burning through its backlog, which could impact its ability to pay dividends in the future, especially after the recent downdraft in oil prices. In addition, there's a major consolidation wave taking place in the offshore drilling sector, which could eventually cause Seadrill Partners to rejoin its parent.
Because of those factors, investors are better off ignoring Seadrill Partners and instead focusing on companies that can pay a sustainable dividend over the long term. Three better options for yield seekers are Pembina Pipeline (NYSE:PBA), ONEOK (NYSE:OKE), and Tallgrass Energy (NYSE:TGE).
Sustainable with upside
While Pembina Pipeline's 5.4%-yielding dividend might not be as high as Seadrill Partners' payout, it should be much more sustainable over the long term. That's because the company has secured long-term contracts that will provide it with predictable cash flow for years to come. Seadrill Partners, on the other hand, could see its cash flow drop significantly over the next year since the bulk of the leases on its offshore drilling rigs are nearing expiration. Pembina Pipeline also has a strong balance sheet and low dividend payout ratio, which bolsters the long-term sustainability of its dividend.
What sets Pembina Pipeline's dividend even further apart from Seadrill Partners' payout is that it will likely continue expanding in the coming years. The pipeline company currently has several billion dollars of expansion projects underway, and even more in development, which position it to grow its cash flow per share by a 10% compound annual rate in the coming years. That should support at least 5% yearly dividend growth, which could give it the fuel to deliver market-beating total returns.
One of a kind
ONEOK, meanwhile, offers an even higher yield of 5.8%. That dividend is also sustainable over the long term since the company has secured long-term fee-based contracts that provide it with predictable cash flow. Furthermore, the pipeline giant also boasts a strong balance sheet and a conservative dividend coverage ratio.
The pipeline giant complements that stability with ample upside. ONEOK has secured more than $6 billion of expansion projects over the past year. Those projects should grow earnings at a double-digit annual pace, which should give the company enough fuel to increase its dividend at a 9% to 11% yearly rate all the way through 2021. That fast-paced dividend growth is a rare find among high-yielding stocks, putting ONEOK in a class of its own.
An outsized yield that's on solid ground
Tallgrass Energy should catch the attention of yield seekers since it currently yields 9.9%. While Tallgrass Energy does have some near-term contract expirations on some of its biggest pipelines, the company believes that it can secure renewal rates that are as good, if not better, than the current ones, which is something Seadrill Partners won't be able to do since dayrates on offshore drilling rigs have plunged in recent years. Those new contracts, when added to expansion projects the company has under development, have led Tallgrass Energy to project that its earnings could expand from an annualized rate of more than $750 million in 2018 up to more than $1.25 billion by 2020. That earnings growth would enable the company to continue increasing its high-yielding payout.
Tallgrass Energy has made good progress on its growth strategy over the past few months. The company recently expanded a joint venture and also plans to increase the capacity of a key pipeline. Those new projects, when combined with the company's strong balance sheet and a conservative dividend payout ratio, enhance the long-term sustainability of Tallgrass Energy's lucrative dividend.
More likely to go up than down
There is a high probability that Seadrill Partners' sky-high dividend could be nearing an end. Not only do many of the its contracts expire in the next year, but the company could be reacquired by its parent company. In light of those risks, investors should ignore this income stock and instead consider Tallgrass Energy, Pembina Pipeline, or ONEOK since all are much more likely to continue increasing their dividends in the future. Those growing income streams could add up to a much bigger payday for investors in the long run.