A sky-high dividend yield can often signal limited growth potential, but that's not always the case. Energy Transfer (ET +0.36%) and MPLX (MPLX +0.38%) stand out for their enticing combination of big-time yields with solid growth prospects. This combo makes them compelling investments.
The master limited partnerships (MLPs) recently showcased their growth by giving their investors another raise. With more growth ahead, their high-yielding distributions should continue rising.
Image source: Getty Images.
The steady growth continues
Energy Transfer recently announced its next quarterly distribution. The MLP set the rate at $0.3325 per unit ($1.33 annualized). The pipeline company has increased its payout each quarter over the last 12 months by more than 3%. With units of the MLP recently below $17, this new rate pushes the forward yield up to 7.8%, putting it several times higher than the S&P 500's 1.2% yield.
The energy midstream giant can easily afford that higher rate. Energy Transfer generated nearly $4.3 billion of cash during the first half of this year, easily covering the less than $2.3 billion it distributed to investors. That allowed the MLP to retain about $2 billion.
NYSE: ET
Key Data Points
Energy Transfer is reinvesting its surplus cash into expansion projects. It expects to fund $5 billion of growth capital investments this year, with most of those projects on track to enter commercial service by the end of next year. They'll provide the company with meaningful incremental cash flow. Meanwhile, it recently approved several more expansion projects, led by the $5.3 billion Desert Southwest Expansion Project, which it expects to finish by the end of 2029.
Organic expansions aren't the MLP's only growth drivers. It has been a consolidator in the midstream sector, often completing at least one multi-billion-dollar deal every year or so. While Energy Transfer hasn't made an acquisition since last year, it's in its best financial position in history, giving it ample capacity to capitalize on the right opportunity when it arises.
Energy Transfer's strong financial profile and visible growth from upcoming expansion projects easily support its plans to continue increasing its high-yielding payout by 3% to 5% each year.
Another high-octane increase
MPLX also recently declared its latest quarterly distribution. The MLP will pay $1.0765 per unit ($4.31 annualized). That's a whopping 12.5% increase from its most recent payment level. With its unit price recently around $51, the MLP's yield is now up to 8.5%.
NYSE: MPLX
Key Data Points
That's MPLX's fourth consecutive year of delivering a double-digit distribution increase and second consecutive 12.5% payout boost. The high-yielding MLP can also easily afford this higher payment level. It produced enough cash to cover its distribution by a comfy 1.6 times in the second quarter. Meanwhile, it ended that period with a low 3.1x leverage ratio, well below the 4.0x range its stable cash flows can support.
MPLX's strong financial profile enables it to invest heavily in expanding its operations. It's deploying over $5 billion into growth opportunities this year, including organic expansions and acquisitions. The MLP has made four deals this year, led by the $2.4 billion acquisition of Northwind Midstream.
The MLP has a long list of organic expansion projects currently under construction. Like Energy Transfer, it has projects underway that should enter commercial service through the end of the decade. That gives MPLX lots of visibility into its long-term growth prospects. The company expects to grow its earnings at a mid-single-digit annual rate, which should support continued annual distribution increases.
Robust total return potential
Energy Transfer and MPLX pay lucrative cash distributions, which they continue to increase. Their strong financial profiles and healthy growth prospects should support further payout increases. These rising distributions, combined with potential unit price appreciation as their earnings grow, give these MLPs robust total return potential. They're great long-term investments for those comfortable with the potential tax complications of receiving the Schedule K-1 Federal Tax Forms these MLPs send their investors each year.
