Dividend yields of under 3% are everywhere. Stocks yielding 5% or more are a bit tougher to find, but there are still hundreds to choose from. However, when a stock sports a yield of above 7%, you have to wonder if it's too good to be true.
Well, at its current share price, master limited partnership (MLP) MPLX (MPLX -0.06%) offers a juicy 7.6% yield. That sounds like a pretty compelling opportunity for an income investor, but is the stock worth buying now?
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A high-yield sector
One red flag for a high yield is if it's being offered by a company in a sector where high yields are uncommon. That's not the case for MPLX.
MPLX is in the midstream oil and natural gas sector. Unlike upstream companies, which do the actual exploration, drilling, and extraction, or downstream companies, which refine and sell oil and natural gas products, midstream companies operate the pipelines, storage terminals, and other infrastructure that helps move oil and natural gas and refined products to where they need to go.
Many midstream companies are organized as MLPs. This gives them favorable tax treatment, but requires them to distribute almost all of their free cash flow each year as dividends to their shareholders. As a result, they often feature high yields. For example, MPLX peer Enterprise Products Partners (EPD 0.06%) currently yields 6.8%.
So we'd expect MPLX to have a high yield, but its 7.6% yield is so high, it's worth double-checking to confirm that its payout is sustainable.
We got you covered
When MLPs pay dividends to their shareholders, they take the funds from a pot of money called distributable cash flow. If an MLP's distributable cash flow was precisely enough to pay all of its shareholders with nothing left over, we'd say that it had "1.0 times" coverage. Obviously, the higher an MLP's coverage number is, the bigger its cushion of extra funds that it could use to pay dividends without a cut even if something went wrong, like a business slowdown or an unexpected expense.
In Q2, MPLX's coverage ratio was a fairly robust 1.5. That's a decent cushion and means MPLX could weather quite a bit of a financial slowdown before it would have to consider a dividend cut.
But MPLX seems pretty far from cutting its distribution: Instead, it has been increasing it in recent years. MPLX hiked its payout by 10% in 2022, another 10% in 2023, and an impressive 12.5% in 2024. There's no guarantee that MPLX will continue to boost its dividend regularly. But a cut seems unlikely.
A well-run company
So the numbers look good for MPLX's yield. But what's the outlook for the business?
Midstream companies primarily grow in two ways: building new infrastructure or buying existing infrastructure from other midstream companies (or sometimes just buying those other companies outright). MPLX has been doing both.
MPLX has more than a dozen planned expansion projects in various stages of completion. That's not unusual in this sector because of the regulatory requirements projects must meet and the massive size and scale of the infrastructure that midstream companies tend to build. Among its many other projects, MPLX is currently building two major Permian-Basin-to-Gulf-Coast gas pipelines that are expected to come online in 2026, and its nearly finished Secretariat processing plant in Texas should come online in the fourth quarter. Other projects in the works include gas fractionators, export terminals, and, of course, more pipelines.
The company has also made some bolt-on acquisitions recently, including its recently completed all-cash $2.4 billion purchase of Northwind Midstream, which operates a network of natural gas gathering pipelines in New Mexico and provides other natural gas-related services.
No red flags here
MPLX is a well-run midstream company with plenty of opportunities for long-term growth. Its dividend yield is high, but its coverage ratio means it should be able to easily sustain its payouts for the foreseeable future.
The only potential issue for investors is the company's MLP structure, which can require shareholders to do some extra paperwork at tax time, particularly if the shares are not being held in a tax-advantaged account. Otherwise, this massive yielder looks like a great choice for investors looking for low-risk income stocks.
