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These 3 Ultra-High-Yield Stocks Are Starting to Look Attractive

By Matthew DiLallo - Aug 16, 2020 at 8:25AM

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A look at some double-digit yields that are increasingly looking sustainable.

This year has not been a good one for income investors. With the COVID-19 outbreak shutting down much of the global economy, many companies slashed their payouts to preserve cash. While investors experienced industrywide dividend destruction, the energy sector was among the hardest hit because demand and pricing for oil cratered.

However, with the economy starting to rebound, taking oil demand up with it, the worst seems to be over for the sector. Now dividend investors can pick through the carnage and find some enticing payouts. Three intriguing options are midstream companies DCP Midstream (DCP -0.06%)Delek Logistics Partners (DKL 1.24%), and EnLink Midstream (ENLC 0.41%), which all yield more than 10%. Here's why income seekers might want to take a closer look at these big-time payouts.

Rising coin stacks with the word yield spelled out on block letters.

Image source: Getty Images.

What industry downturn?

DCP Midstream currently yields an enticing 10.7%. What stands out about this payout is that the master limited partnership has already sliced its distribution by 50% this year. It made that move, as well as reduced capital spending and other costs, to preserve cash during the darkest days of this year's oil market downturn since it didn't know how much money it would make this year. 

However, the first half of the year wasn't anywhere near as bad as the company feared. Instead of crashing, the MLP's earnings and cash flow rose 11% and 5%, respectively, versus the year-ago periods, with both setting records. Fueling that growth amid the storm was a combination of expansion projects, cost reductions, and its ability to capture market opportunities. That puts DCP Midstream on track to achieve its original guidance and on pace to produce more than enough cash to cover its big-time payout and capital projects with room to spare. And that, in turn, will help drive further improvement in its leverage ratio, which already reached its targeted level of 4.0 times debt-to-EBITDA during the second quarter. These numbers suggest that the company should have no problem maintaining its ultra-high-yielding payout. 

Wise decisions are paying dividends

EnLink Midstream also offers an eye-popping 12.1% yield despite cutting its payout 50% earlier this year. However, that decision is having the desired effect because it's driving rapid balance sheet improvement. The MLP generated a healthy $72 million of excess free cash flow during the turbulent second quarter after paying its dividend and funding capital projects. That helped push its leverage ratio down from 4.6 times debt-to-EBITDA at the end of the first quarter to 4.3 at the end of June. 

Because of the strong second-quarter showing, EnLink Midstream is on track to meet or exceed the high end of its excess free cash flow guidance range of $260 million to $280 million this year. That will enable the MLP to continue pushing down leverage, putting its big-time payout on an even firmer long-term foundation.

Quietly keeping its impressive streak alive

Delek Logistics Partners was one of the few midstream companies that didn't slash its payout earlier this year. Instead, the MLP has continued to give its investors raises, with it recently declaring its 29th straight quarterly increase. That payout, which currently yields 10.4%, seems to be on solid ground, given the MLP's financial profile.

For example, the company generated enough cash during the second quarter to cover its distribution by 1.58 times. That enabled it to retain cash to finance growth while keeping its leverage ratio down to a reasonably comfortable level of 4.1 times debt-to-EBITDA. It expects that number to fall below 4.0 by year-end, which will give it even more financial flexibility to keep expanding its operations, potentially fueling continued distribution growth.  

Compelling numbers

DCP Midstream, EnLink Midstream, and Delek Logistics Partners are all generating more than enough cash to cover their payouts and capital projects with room to spare. That means they're producing excess cash to pay down debt, putting their big-time payouts on an even more sustainable footing. And that makes them increasingly compelling options for yield-seeking investors.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

DCP Midstream, LP Stock Quote
DCP Midstream, LP
$35.12 (-0.06%) $0.02
EnLink Midstream, LLC Stock Quote
EnLink Midstream, LLC
$9.87 (0.41%) $0.04
Delek Logistics Partners, LP Stock Quote
Delek Logistics Partners, LP
$55.74 (1.24%) $0.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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