DKL Stock: Collect Growing Dividends From This 10.9% Yielder
A High-Yield Stock You Likely Haven’t Considered
In this day and age, a dividend yield north of 10% may seem too good to be true. What’s even more surprising, though, is that this double-digit yielder also delivers consistent payout increases.
I’m talking about Delek Logistics Partners LP (NYSE:DKL), a master limited partnership (MLP) headquartered in Brentwood, Tennessee.
The partnership came into existence in 2012. It was created by Delek US Holdings Inc (NYSE:DK) to own, operate, construct, and acquire crude oil and refined products, logistics, and marketing assets.
Because Delek Logistics Partners does not serve consumers directly, most people have never heard of it. However, DKL stock deserves income investors’ attention for a very simple reason—the sheer size of its payout.
You see, on April 26, 2018, Delek Logistics Partners declared a quarterly cash distribution of $0.75 per limited partner unit. On an annualized basis, that came out to $3.00 per share. Since DKL stock trades at $27.60 apiece, that annualized payout translated to a jaw-dropping distribution yield of 10.9%. (Source: “Delek Logistics Partners, LP Increases Quarterly Cash Distribution to $0.75 per Limited Partner Unit,” Delek Logistics Partners LP, April 26, 2018.)
Usually, investors have to choose between having a high current yield and dividend growth potential. However, unitholders of Delek Logistics Partners have been collecting both.
Consistent Distribution Growth
When an MLP is formed, it usually has a minimum distribution rate. In the case of Delek Logistics Partners, its minimum quarterly distribution rate was $0.375 per unit. The partnership’s first actual cash payment of $0.224 per unit made in February 2013 represented a prorated amount corresponding to the minimum quarterly distribution rate. (Source: “Delek Logistics Partners, LP Declares Initial Quarterly Cash Distribution,” Delek Logistics Partners LP, January 24, 2013.)
Since then, Delek Logistics Partners has raised its payout every single quarter. With its latest payment of $0.75 per unit, the partnership’s quarterly distribution rate has increased by 100%. (Source: “Dividend History for Delek Logistics Partners (dkl),” Street Insider, last accessed July 9, 2018.)
Delek Logistics Partners LP: Is the Payout Safe?
Of course, as I mentioned earlier, an ultra-high yielder that keeps growing its payout might seem too good to be true. Therefore, it’s only natural for investors to ask, “Is the payout safe?”
Well, let’s take a look at the partnership’s financials.
Like most MLPs, Delek Logistics Partners reports something called distributable cash flow. Comparing this metric to an MLP’s actual cash distribution would show whether it generated enough cash to meet its distribution obligations.
In the first quarter of 2018, Delek Logistics Partners generated $27.3 million of distributable cash flow, which was a substantial increase from the $18.4 million earned in the year-ago period. And since the partnership’s cash distributions totaled $24.0 million for the quarter, it had a distributable cash flow coverage ratio of 1.14 times, leaving a margin of safety. (Source: “Delek Logistics Partners, LP Reports First Quarter 2018 Results,” Delek Logistics Partners LP, May 7, 2018.)
And if you are concerned about the partnership’s exposure to oil prices, keep in mind that DKL focuses primarily on providing logistics services. Right now, Delek Logistics Partners’ pipeline and transportation segment consists of 805 miles of crude oil and product transportation pipelines, approximately 600 miles of crude oil gathering systems, rail offloading capacity, and storage facilities with 10 million barrels of active shell capacity. (Source: “Investor Presentation,” Delek Logistics Partners LP, last accessed July 10, 2018.)
Note that, with these assets, the partnership conducts most of its business through long-term, fee-based contracts with minimum volume commitments. Therefore, DKL can generate stable cash flows even as oil prices continue to fluctuate.
Bottom Line on Delek Logistics Partners LP
Going forward, DKL unitholders will likely have more distribution hikes to look forward to. At Delek Logistics Partners LP’s latest investor presentation, management said that they expect the partnership to grow its per-unit cash distribution by at least 10% annually through 2019.
With a double-digit yield and regular payout increases, Delek Logistics could be an opportunity for income investors.
Dear Reader: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. We are 100% independent in that we are not affiliated with any bank or brokerage house. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose. The opinions in this content are just that, opinions of the authors. We are a publishing company and the opinions, comments, stories, reports, advertisements and articles we publish are for informational and educational purposes only; nothing herein should be considered personalized investment advice. Before you make any investment, check with your investment professional (advisor). We urge our readers to review the financial statements and prospectus of any company they are interested in. We are not responsible for any damages or losses arising from the use of any information herein. Past performance is not a guarantee of future results. All registered trademarks are the property of their respective owners
Sign up to receive our FREE Income Investors newsletter along with our special offers and get our FREE report:
5 Dividend Stocks to Own Forever
This is an entirely free service. No credit card required. You can opt-out at anytime.
We hate spam as much as you do.