Income-seeking investors don't have that many options to score an enticing yield. With the Federal Reserve recently cutting interest rates, the yields on lower-risk investments like bank CDs and government bonds have fallen. Meanwhile, most dividend-paying stocks don't offer compelling yields considering that the S&P 500's average is less than 2%.
There are, however, some vehicles that offer income seekers some enticing payouts. Leading the way are energy MLPs. Three options that currently offer big-time yields are BP Midstream Partners (BPMP), Shell Midstream Partners (SHLX), and Hess Midstream Partners (HESM). Here's why investors will want to consider adding this trio to their income watch list.
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A big-time yield and growth potential
BP Midstream is an MLP formed by oil giant BP (BP -1.17%) to operate its U.S. midstream infrastructure. The company owns interests in several pipeline systems and storage facilities that support its parent's operations. In exchange, BP Midstream gets paid fees backed by long-term contracts from BP and other customers as their volumes flow through these systems.
BP Midstream uses those funds to pay a cash distribution to investors that currently yields 9%. While a payout that high can be a cause for concern, that's not the case with BP Midstream. For starters, it produced $42.9 million in distributable cash flow during the second quarter, which covered its payout by 1.25 times. Meanwhile, the company has a strong balance sheet, backed by a low leverage ratio.
Because of that, BP Midstream has the financial flexibility to acquire additional assets from BP. The companies completed their first such transaction last October, which provided BP Midstream with the fuel to grow its payout by a mid-teens rate this year. With plenty of financial flexibility, the company can make more deals with BP. That growth potential adds to this high-yield stock's appeal.
Ample income and upside
Shell Midstream shares many things in common with BP Midstream. It, too, has a big oil parent in Royal Dutch Shell (RDS.A) (RDS.B), which, likewise, formed an MLP to operate its U.S. midstream infrastructure. The company also generates stable cash flow backed by long-term, fee-based contracts with Shell and other customers. Because of that, Shell Midstream's 8.1%-yielding payout is on solid ground.
Shell Midstream grows that payout by completing dropdown transactions with Shell. The two recently made an $800 million deal, which gave the MLP more fuel to keep growing its payout. The company's latest increase was 17.8% above the year-ago level. That marked the 18th consecutive quarter that it has raised its distribution. The MLP expects this trend to continue, with it targeting a mid-teens distribution growth rate for 2019. That income with upside makes Shell Midstream a compelling income stock to consider.
Lots of running room to push this high yield even higher
Hess Midstream Partners also has an oil-producing parent in Hess (HES 0.65%). That company created its MLP to focus on operating its midstream infrastructure in North Dakota's Bakken shale. As a result, it has a narrower focus than Shell Midstream and BP Midstream, which own diversified portfolios of infrastructure assets across the U.S.
Hess Midstream's Bakken-focused assets still generate predictable cash flow that it uses to support its 8.3%-yielding payout. That payout is on a rock-solid foundation since Hess collects more than enough cash to cover its payout. It also has a virtually debt-free balance sheet.
The company also has plenty of growth potential. It sees its cash flow rising at a more than 15% annual rate through 2021, fueled by Hess' growing production volumes in that region. Consequently, Hess Midstream believes it can increase its payout at a 15% annual rate over that time frame. And with a top-notch balance sheet, the company has ample financial capacity to make deals that would give it more fuel to grow its high-yield payout. So, it's a compelling option for investors seeking growth and income.
Solid choices for income-seeking investors
These three midstream companies all generate steady cash flow by operating infrastructure that's crucial to support their oil-producing parents. That gives them the funds to pay big-time distributions. All maintain strong balance sheets, providing them with the flexibility to acquire more assets from their parents as well as third parties. Income-seeking investors will want to take a closer look at this trio by at least putting them on their watch lists.
