Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B) pays out one of the highest dividends among oil stocks, at 5.8%. However, the global oil giant offers investors another income option that's even more attractive. Its master limited partnership (MLP), Shell Midstream Partners (NYSE:SHLX), pays an even higher rate of 7.8%. Further, Shell believes it can grow its MLP's payout by a mid-teen rate this year.

Here's a closer look at this big-oil-backed income machine.

$100 bills with the word dividend on top.

Image source: Getty Images.

Shell Midstream Partners 101

Shell formed its MLP in late 2014, just as oil prices started crashing, to acquire and develop midstream assets supporting its U.S. operations. Shell initially seeded its MLP with interests in some of its oil and refined products pipelines.

Since that time, Shell Midstream has acquired more than $2.5 billion in midstream assets from its parent and third parties. These have included stakes in additional onshore and offshore pipelines, storage terminals, and an interest in a natural gas gathering system developed by Crestwood Equity Partners (NYSE:CEQP) to support Shell's growth in the Delaware Basin.

These acquisitions have given Shell Midstream the fuel to increase its distribution to investors at a 20% compound annual growth rate since its inception. Further, the company has delivered this fast-paced growth while maintaining a solid financial profile. Not only does it cover its current distribution with cash flow by a comfortable 1.2 times, but the company has a conservative leverage ratio of 2.8 times. That gives it the financial flexibility to maintain its payout, as well as invest in expanding its operations.

What's ahead for Shell Midstream Partners?

Last May, Shell Midstream completed its largest acquisition to date. The MLP paid $1.22 billion for a stake in the Amberjack pipeline in the Gulf of Mexico. That deal provided the company with a near-term cash flow boost and visible growth, since volumes are on track to increase by a third by the end of this year. On top of that, the MLP should also benefit from organic expansion at its joint venture with Crestwood and elsewhere in the Gulf of Mexico. Add that to some additional support from Shell this year, and Shell Midstream has the financial flexibility to grow its distribution at a mid-teens rate in 2019.

The company could continue increasing its payout for several more years. Two factors drive that view. First, there's ample organic growth potential embedded in the company's existing assets. For example, its joint venture with Crestwood should see steady volume growth over the next several years as Shell ramps up its drilling activities in the region. Meanwhile, Shell and other producers remain active in the Gulf of Mexico near the company's existing infrastructure. As they develop these discoveries, those barrels could flow through Shell Midstream's systems.

The second driver is Shell Midstream's ability to acquire additional midstream infrastructure from Shell, as well as third parties. On the one hand, it doesn't have as much financial flexibility as it did in the past since it's costlier for MLPs to sell equity to finance growth following last year's rule change.

However, Shell Midstream's combination of retained cash flow and borrowing capacity could fund smaller acquisitions. These dual fuels should provide the company with the incremental cash flow needed to continue growing its distribution, though likely at a slower pace than in the past.

Even better than its parent

While Shell is one of the best dividend payers in the oil patch, its MLP offers an even more enticing option for income seekers. Not only does Shell Midstream have a much higher yield, but a higher growth rate, as well. Because of that, it could potentially generate more income and a higher total return than its parent in the years to come.