Oil giant BP (NYSE:BP) is among the dividend leaders in the oil patch. The company's stock currently yields well above average at 5.4%. However, as appealing as that payout might be, the company offers income-seekers an even more enticing option: its master limited partnership (MLP) BP Midstream Partners (NYSE:BPMP). BP's MLP offers not only a higher-yielding payout at 7.9%, but also a much faster growth rate.

Here's a closer look at BP's other income option.

A roll of cash next to a calculator and a sticky note with the word dividends.

Image source: Getty Images.

BP Midstream 101

BP formed BP Midstream in late 2017 to acquire and own midstream assets supporting the company's U.S. operations. At the time of its initial public offering (IPO), BP Midstream held stakes in several onshore and offshore pipelines that transported oil, natural gas, and refined products. These assets support BP's operations in both the Gulf of Mexico and its Whiting Refinery in Indiana. Because of their importance, BP and other customers have signed long-term, fee-based contracts to secure their right to use these assets. Those agreements provide BP Midstream with stable cash flow to support its high-yielding payout.

BP sold additional assets to its MLP last October. That deal helped diversify BP Midstream's portfolio by adding a stake in a storage terminal joint venture. The company also acquired interests in some other offshore oil and natural gas pipelines.

That deal enabled BP Midstream to generate $143.9 million in cash flow last year, which was at the top end of its guidance range. It also helped the company grow its payout at a mid-teens rate from its initial payout level following the IPO. Overall, the company covered its high-yielding dividend by 1.21 times for the year, including by 1.29 times in the fourth quarter, both healthy levels for an MLP. The company also has a solid balance sheet, with about $200 million in cash and available credit.

What's ahead for BP Midstream

BP Midstream's recent acquisition should help grow its cash flow up to the $160 million-$170 million range this year. That's enough money to enable the company to continue expanding its payout at a mid-teen pace for 2019. Meanwhile, there's enough organic growth embedded in BP Midstream's existing assets to support 5% to 6% distribution growth in 2020.

However, the company has the financial flexibility through a combination of retained cash flow and additional borrowings to acquire other midstream assets from BP. The MLP believes that it should be able to find a suitable deal that would support a mid-teens growth rate in 2020 while maintaining a strong balance sheet. For comparison's sake, BP only grew its dividend 2.5% last year, which was its first increase since the oil market crash started in 2014.

BP Midstream could continue expanding its payout at a faster pace than its parent beyond 2020. That's because the company's Gulf of Mexico business remains well positioned to capture growth in the coming years. Oil companies have recently given the green light to several large-scale projects near the company's existing footprint in the region, which could drive additional volumes through its systems.

BP also still owns a vast portfolio of midstream assets that it could eventually drop down to its MLP. These include stakes in other onshore and offshore pipelines as well as terminals and storage facilities and its business to business fuel distribution services. On top of that, BP Midstream could acquire assets from third-parties, such as consolidating its interests in joint ventures or acquiring other assets that would support BP's operations.

More income and growth without the oil price volatility

BP pays among the more generous dividends in the oil patch. One of the trade-offs for that higher yield is the higher risk that comes with its exposure to oil prices. BP Midstream, on the other hand, doesn't have that exposure, since it gets paid steady fees as volumes flow through its system. It can therefore afford to pay a higher rate that should increase at a faster pace. That's why investors who like BP's dividend might want to take a closer look at its MLP's payout.