Many high-yielding dividend stocks lack visible growth. They often don’t have much expansion potential, so they pay out most of their cash flow in dividends. That lack of growth is weighing on their valuations, causing their returns to rise.
However, Energy transfer (NYSE:ET) And Hesse Middle Stream (NYSE: HESM) have a lot of growth. That makes them stand out high-yielding dividend stocks. They offer large payouts that they expect to increase at a predictable pace.
Double growth engines
Energy transfer currently yields no less than 9%. The master limited partnership (MLP) expects to increase its already above-average payout at a fixed rate. Earlier this year, the company set a goal of increasing distribution by $0.0025 per unit ($0.01 per year) every quarter. That amounts to an annual growth of 3% to 5%.
The company’s massive cash flows and growing pipeline of expansion projects are driving that plan. Energy Transfer expects to generate approximately $7.5 billion in distributable cash flow annually. It expects to pay out $4 billion a year in benefits at current rates. That means it will retain about $3.5 billion in cash annually.
The MLP CFO noted call for the second quarter that the country has an “incredible growth gap.” That drives its view that it can invest $2 billion to $3 billion a year in growth projects, with the rest of the excess discretionary cash spent on shoring up its already solid balance sheet or buying back units.
Currently, it plans to spend $2 billion on capital projects by 2023. While most of these projects will come into service in the coming year, it recently approved a nearly $1.3 billion expansion of an export terminal that is slated to go into service in mid-2025. It is also pursuing expansion at another export facility, including work on a long-delayed liquefied natural gas export project and a carbon capture and storage project. These expansion projects will increase the company’s cash flow, giving it more money to pay benefits.
In addition to organic expansions, Energy Transfer has an excellent track record in realizing positive 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 contribute to 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 has set a target of increasing payments by around 5% per year until at least 2025. In each of the past three years, the country has exceeded this target, with incremental increases above the 5% target of 10% (2020), 5% (2021) and 3% (2022).
The midstream company has visible growth in store to fuel its growing dividend. The minimum volume contracts with oil and gas producer Hes and other customers will drive 10% annual volume growth through 2025. That should support more than 10% annual growth in adjusted volumes. EBITDA and adjusted free cash flow during that time frame.
Hess Midstream expects to achieve that growth while capital expenditures remain approximately the same. The country has already built out most of its infrastructure and expects to spend only about $210 million a year on additional compression and connecting newly drilled wells to its system. As a result, the company will generate additional excess cash flow after it reaches its dividend growth target. The company estimates it will have $1 billion in financial flexibility through 2025, driven by growing excess free cash flow and declining leverage ratio, with the latter already among the lowest in the midstream sector. It could use that financial flexibility to buy back shares or implement incremental dividend increases.
Bankable income with visible growth
Energy Transfer and Hess Midstream generate a lot of stable cash flow. That gives them money to pay attractive dividends and invest in growth projects. These expansions ensure visible cash flow growth. That gives these companies the confidence to set clear dividend growth targets. It makes them attractive options for investors looking for attractive payouts that should increase at a predictable pace in the coming years.
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Matthew DiLallo has positions in Crestwood Equity Partners and Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.