A steady dividend income can greatly supplement your regular monthly income. Dividend-paying stocks offer you not only a sturdy income stream, but also attractive capital appreciation potential. However, to achieve these twin objectives, it is important to select dividend stocks with a positive growth outlook.
Though higher yields are generally associated with higher risks, here is a top energy stock that looks like a clear exception to this rule.
Stable cash flows
The energy stock that I'm referring to is MPLX (MPLX 0.14%). It is a master limited partnership (MLP) formed by Marathon Petroleum (MPC -2.00%). It primarily gathers, transports, stores, and distributes crude oil and refined products. MPLX is also involved in the gathering, processing, and transportation of natural gas and liquids.
MPLX is tied to Marathon Petroleum in more than one way. First, Marathon owns 64% of MPLX's outstanding common units. Second, Marathon accounts for roughly half of MPLX's total revenue. So, Marathon Petroleum will be a key source of revenue for MPLX in the coming years. Backing from Marathon Petroleum -- the largest crude oil refiner in the U.S. -- is one of MPLX's key strengths.
MPLX generates relatively stable cash flows under long-term, fee-based agreements with Marathon Petroleum for transportation, terminal, and storage services. Most of these agreements include minimum volume commitments from Marathon, which means MPLX will get this fee irrespective of the volumes actually transported or stored.
Strong financial performance
MPLX has been growing its earnings and dividends steadily over the years. In the latest quarter, the company grew its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 6% over the same quarter last year. Higher transport, storage, and gas gathering and processing volumes contributed to MPLX's earnings growth.
As the chart shows, MPLX has paid a constant or growing distribution every quarter since its inception in 2012. The stock offers a distribution yield of 8.6% as of this writing. That's higher than the stock's historical average yield. Importantly, the company's distributable cash flow in the second quarter was 1.69 times its distribution payment. That shows that MPLX has sufficient cushion to cover its distribution payments, even if earnings fall a bit.
Additionally, MPLX is repurchasing its common units as a way to return value to its shareholders. It repurchased $35 million of common units in the second quarter. As of June 30, the company had about $202 million remaining under its $1 billion unit repurchase program. The company has also started a new $1 billion unit repurchase program.
MPLX reported a debt-to-adjusted EBITDA ratio of 3.5 as of June 30, which is quite conservative in the oil and gas infrastructure industry.
A must-own dividend stock
The backing of a top refiner, steady fee-based earnings, a strong distribution payments history, reasonable debt levels, strong coverage, and an attractive yield aren't the only reasons to buy MPLX stock. Another key factor that makes MPLX attractive is its growth plans. MPLX continues to expand its natural gas transport and crude gathering assets supporting the Permian and Bakken regions. The company is also expanding its gas processing capacity by building new plants in the Permian and Marcellus basins. In all, it plans to spend $700 million in 2022 on growth projects. These should continue fueling its distribution growth in the coming years.
Despite the growth in renewables, oil and gas are expected to play a key role in the global energy mix in the decades to come. That bodes well for midstream stocks such as MPLX. Overall, MPLX ticks all the boxes for a top dividend stock and must find a place in any dividend investor's portfolio.