A larger, wealthier, and longer-living population means energy demand should continue to increase in the coming decade. If so, there could be robust tailwinds supporting the already sky-high dividend payouts at Hess Midstream Partners (HESM), Terraform Power (TERP), and MPLX LP (MPLX 0.03%). Read on to find out why these high-dividend-yielding energy stocks could be perfect for income portfolios now.
Solid demand makes this high-dividend play attractive
Todd Campbell (Hess Midstream Partners): How does a 7% dividend yield sound? Pretty good, I bet. Even better, that dividend yield looks sound given Hess Midstream Partners' business is reliant upon Hess (HES 0.11%), a major player in the Bakken, where Hess Midstream's assets are located.
Hess Midstream's assets include pipelines, storage facilities, and rail assets necessary for transporting oil and gas that's produced by Hess and its peers in the Bakken, and Hess plans to boost Bakken production at a 20% compounded rate through 2021.
In 2019, Hess Midstream forecasts its gas-gathering volume will eclipse 280 million cubic foot per day, gas processing volumes will improve to over 265 million cubic foot per day, and crude gathering volume will surpass 105,000 barrels of oil daily. Its crude terminaling volume is expected to be above 120,000 barrels of oil daily, too.
That forecast is nicely higher than 2018's results. In 2018, gas-gathering volume was 248 million cubic foot per day, gas-processing volume was 233 million cubic foot per day, crude-gathering volume was 89,000 barrels daily, and crude terminaling was 101,000 barrels daily.
The anticipated year-over-year increase in activity at Hess Midstream suggests its revenue will climb nicely from the $662 million reported in 2018. Importantly, the investments it's making in additional assets in the Bakken suggest there's still room to provide more services to Hess and its peers, fueling future dividend payments.
A great energy dividend for the future
Travis Hoium (TerraForm Power): High dividends are meaningless if the cash flow behind them isn't sustainable. The energy industry can be particularly volatile, with commodity prices and a shift to renewable energy throwing the industry for a loop from time to time. That's one reason I like renewable energy yieldcos and TerraForm Power's 5.5% dividend yield in particular.
Yieldcos own renewable energy projects and then sell electricity to utilities on a long-term contract basis. In TerraForm Power's case, the average contract has 13 years remaining on it, and 17% of projects have a duration of 20 years or more.
Not only is cash flow contracted for years to come, TerraForm Power keeps between 15% and 20% of its cash available for distribution to pay down debt or fund growth acquisition. Long term, that should keep the dividend growing.
Now under the control of Brookfield Asset Management (BN -1.33%), TerraForm Power has a solid financial foundation and a pipeline of projects it can buy from third parties. And management now aims to grow the dividend by 5% to 8% per year, a much more sustainable rate than the 15% or more that TerraForm Power was once shooting for. If you're looking for a steady energy dividend, this is as good as it gets.
An absurdly high yield for a stable business
Tyler Crowe (MPLX LP): At a distribution yield of 8.5%, there aren't a lot of stocks out there that offer the kind of yield and payout security that MPLX does. So if you're looking for large cash payouts from your stocks, this is one you should consider.
Typically, any stock with a yield that high is one with a questionable outlook. Yet the company's financials suggest this isn't the case. MPLX's distribution coverage ratio for the most recent quarter was 1.41 times. That means it generated enough cash to cover its payout with a considerable amount left over to invest in growth projects. Also, its debt-to-EBITDA ratio of 3.8 times is on the low end of peers. These two metrics are important for master limited partnerships, and both say the company's financials are in good shape.
One issue that has been hanging over MPLX's head lately is the inevitable acquisition of Andeavor Logistics LP (ANDX). MPLX's parent company, Marathon Petroleum, acquired Andeavor Logistics' parent company in 2018, and it made little sense for Marathon to own two separate subsidiaries performing similar functions. After the most recent deal announcement, though, it appears the merger won't fundamentally alter the investment thesis for MPLX shareholders.
The combined footprint of these two midstream companies will give MPLX plenty of new construction projects to maintain its distribution growth. That growth, coupled with MPLX's management doing right by investors over the past several years, suggests that this is a great high-yield stock to consider.