These 2 Dividend Stocks Offer Big-Time Yields With Highly Visible Income Growth

Many high-yielding dividend stocks lack visible growth. They often don't have much expansion potential, leading them to pay out most of their cash flow in dividends. That lack of growth weighs on their valuations, pushing up their yields.

However, Energy Transfer (ET 0.12%) and Hess Midstream (HESM -0.09%) have plenty of growth. That makes them stand out among high-yielding dividend stocks. They offer big-time payouts that they expect to increase at a predictable pace.

Dual growth drivers

Energy Transfer currently yields a whopping 9%. The master limited partnership (MLP) expects to increase its already well-above-average payout at a set rate. It established a target earlier this year to raise its distribution by $0.0025 per unit each quarter ($0.01 per year). That works out to a 3% to 5% annual growth rate. 

Fueling that plan is the company's enormous cash flows and growing pipeline of expansion projects. Energy Transfer anticipates it can produce about $7.5 billion of annual distributable cash flow. It expects to pay out $4 billion per year in distributions at the current rate. That means it will retain about $3.5 billion in cash each year.

The MLP's CFO noted on the second-quarter call that it has an "incredible backlog of growth opportunities." That drives its view that it can invest $2 billion to $3 billion per year on growth projects, with the rest of its excess free cash going toward strengthening its already solid balance sheet or unit repurchases. 

It currently plans to spend $2 billion on capital projects in 2023. While most of those projects will enter service within the next year, it recently approved a nearly $1.3 billion expansion of an export terminal that should start service by mid-2025. It's also pursuing an expansion at another export facility, working on a long-delayed liquefied natural gas export project and a carbon capture and storage project, among other opportunities. These expansion projects will grow the company's cash flow, giving it more money to pay distributions. 

In addition to organic expansions, Energy Transfer has an excellent track record of making accretive acquisitions. It recently closed a deal to acquire Lotus Midstream for about $1.5 billion. Meanwhile, it has agreed to acquire fellow MLP Crestwood Equity Partners for $7.1 billion. These deals are accretive to its distributable cash flow per unit, providing additional fuel for distribution growth. 

A free cash flow growth machine

Hess Midstream currently yields 7.9%. The pipeline company set a target of increasing its payment by around 5% per year through at least 2025. It has exceeded that target in each of the last three years, providing incremental increases above the 5% target of 10% (2020), 5% (2021) and 3% (2022).

The midstream company has visible growth coming down the pipeline to fuel its growing dividend. Its minimum volume contracts with oil and gas producer Hess and other customers will drive 10% annual volume growth through 2025. That should support more than 10% annual growth in adjusted EBITDA and adjusted free cash flow during that timeframe.

Hess Midstream expects to deliver that growth while keeping capital spending roughly flat. It has already built out most of its infrastructure and anticipates spending only about $210 million per year on additional compression and connecting newly drilled wells to its system. As a result, it will generate additional excess cash flow after achieving its dividend growth target. The company estimates it will have $1 billion of financial flexibility through 2025, driven by its growing excess free cash flow and falling leverage ratio, with the latter already among the lowest in the midstream sector. It could use that financial flexibility to repurchase shares or provide incremental dividend increases.

Bankable income with visible growth

Energy Transfer and Hess Midstream generate lots of stable cash flow. That gives them money to pay attractive dividends and invest in growth projects. Those expansions provide them with visible cash flow growth. That's giving these companies the confidence to set clear dividend growth target rates. It makes them compelling options for investors seeking attractive payouts that should rise at a predictable rate in the coming years.