Very few stocks offer investors a high earnings growth rate, along with a high dividend yield. That's because most growth-focused companies need to reinvest a substantial portion of their cash flow into expanding their operations, which limits their ability to pay a big dividend.
However, there are a few companies out there that offer investors the best of both worlds. Three that stand out are energy midstream companies ONEOK (OKE 4.51%), Crestwood Equity Partners (CEQP 1.40%), and Energy Transfer (ET 2.81%). In the case of this trio, they all yield more than 4.5% while boasting double-digit earnings growth. That gives them the potential to generate market-crushing total returns in the coming years.
Hitting the accelerator in 2020
ONEOK pays its investors a well above average dividend that currently yields 4.7%. This payout is on a firm foundation. That's because the pipeline company has long-term contracts in place that supply it with about 85% of its earnings, which gives it highly predictable cash flow. Meanwhile, ONEOK pays out less than 70% of those funds, which allows it to retain some of the cash needed to invest in expansion projects. Finally, it has a strong investment-grade balance sheet backed by a 4.2 times debt-to-EBITDA ratio, which is just above its 4.0 leverage target level.
The reason ONEOK's leverage is a bit high right now is that it's in the midst of a major expansion phase. It has about $6 billion of projects currently under construction, which provides it with visible earnings growth through 2021. Several of those expansions will come online toward the end of this year and into early 2020, leaving ONEOK on track to grow its EBITDA by more than 20% next year. Meanwhile, its overall earnings per share should increase at a more than 9% compound annual rate in the 2019-through-2021 timeframe. That puts it in the top tier of growth companies in the S&P 500.
Peer-leading cash flow growth
Crestwood Equity Partners ticks the box for income-seeking investors, given its current yield of 6.1%, which is more than triple the market's average. Meanwhile, like ONEOK, that payout is on solid ground. That's because Crestwood gets more than 85% of its earnings from stable long-term contracts. Meanwhile, it only pays out around 60% of its cash flow to support its distribution to investors and has a leverage ratio in the range of 4.0 to 4.5 times its debt-to-EBITDA. While that's currently above its 4.0 target, leverage should decline closer to 3.5 next year as its expansion projects start coming online.
Crestwood has several growth projects in various stages of completion. It finished a new natural gas processing plant in July and expects to complete another one early next year, leaving the company on track to grow its EBITDA at a 20% compound annual rate over the 2018-to-2020 timeframe. Meanwhile, its cash flow per share will expand at an even faster rate of nearly 25% over that period. That leads its peer group, making Crestwood an excellent option for investors seeking both a high yield and a high growth rate.
Big-time yield and growth
Energy Transfer offers the highest yield of this trio at 9%. What's impressive about the company's dividend is that it only pays out about 50% of its cash to support that ultra-high-yield. The reason it's so high despite that conservative payout ratio is that Energy Transfer's trades at a dirt cheap valuation.
That low price doesn't make much sense, given Energy Transfer's growth prospects. The company expects to invest $4.6 billion to $4.8 billion on expansion projects this year. That sets it up to generate between $10.8 billion and $11 billion in EBITDA, which is about 15% above 2018's total. Meanwhile, the company's earnings should continue growing at an above-average pace next year as it finishes more expansion projects.
The fuel to produce big-time gains
Most dividend investors believe they need to sacrifice growth for yield. However, that's not the case with this trio of energy stocks. Because these companies boast a high yield as well as a high growth rate, they have the potential to produce outsize total returns. That's makes them great stocks to consider buying.