The average dividend yield of stocks in the S&P 500 is less than 2%. Most investors would consider anything over 4% to be a high dividend yield.
Some stocks, however, go well above and beyond that level. Two such ultra-high-yielders are midstream companies Tallgrass Energy (TGE) and Oasis Midstream Partners (OMP), which both currently yield more than 8%. While there's a bit more risk with those higher yields, they're compelling enough that income-seekers will want to at least put them on their watchlists.
A monster yield with even bigger upside potential
Tallgrass Energy currently yields an eye-catching 8.4%. The company supports that payout with very stable cash flow as customers pay fees backed by long-term contracts for capacity on its pipelines and other energy infrastructure assets. Last year, Tallgrass paid out about 80% of its cash flow in dividends, which is a comfortable level for a pipeline company. It reinvested the remaining cash into expansion projects, supplementing its funding needs with a solid balance sheet.
Tallgrass Energy currently has several large-scale expansion projects in development, which position it to grow cash flow at a high rate over the next few years. The company is working on developing an integrated "wellhead-to-water" system to move oil produced in the Rockies to refineries and export facilities on the Louisiana coast. It has taken several steps over the past few months to make this vision a reality.
Last fall, the company expanded its joint venture with Silver Creek Midstream to create a large-scale oil gathering pipeline system in the Powder River Basin of Wyoming to move oil from newly drilled wells to its regional hub in the state. It followed that up earlier this year by teaming up with energy infrastructure giant Kinder Morgan (KMI 0.43%) to increase oil transportation capacity out of the Rockies region. This joint venture would combine new and existing pipelines to move more oil from its hub in Wyoming to Kinder Morgan's storage complex in Oklahoma. From there oil could flow on Tallgrass Energy's proposed Seahorse Pipeline to the coast of Louisiana where the company is developing the Plaquemines Liquids Terminal to export crude to global markets. It's an ambitious plan that could significantly increase Tallgrass Energy's cash flow in the coming years, which it could use to boost its already lucrative dividend. That upside potential makes it a compelling high-yield stock to watch.
A high-yield with a high-octane growth rate
Oasis Midstream Partners currently offers an even higher yield at 8.9%. The company also supports that payout with predictable cash flow from long-term contracts, primarily to support the operations of oil producer Oasis Petroleum (OAS) in North Dakota's Bakken Shale.
While the company paid out more than 80% of its cash flow last year via its ultra-high-yield distribution, that number should meaningfully improve this year. That's due in part to spending $250 million to buy additional midstream assets from Oasis Petroleum late last year, which will provide a meaningful boost to cash flow in 2019. Add that to the expectation for significant organic growth as additional volumes from Oasis and third-parties flow through its system, and Oasis Midstream believes its payout ratio could fall to as low as 50% this year even as it expects to increase its distribution by 20%. The company believes it can maintain that 20% annual distribution growth rate through at least the end of 2021, fueled by rising volumes from Oasis.
One of the concerns, however, with Oasis Midstream is that it's relying heavily on one customer (Oasis Petroleum) and one region (the Bakken) to fuel growth. That makes it riskier than its more diversified peers. While the reward of a fast growing high yield distribution might be worth it for some income-seekers, others might want to put it on their watchlist until Oasis Midstream adds more third-party customers to its existing network and diversifies into another region such as the Permian Basin where Oasis also operates.
Big-time yields to keep an eye on
Both Tallgrass Energy and Oasis Midstream Partners offer enticing ultra-high-yielding dividends. However, with that extra reward comes some additional risk. That's why investors should consider watching them for a while, keeping a close eye on moves they make to reduce their risk profiles.