A High-Yield Stock You Likely Haven’t Thought Of
Income investors are constantly on the lookout for high-yield stocks, but the blunt reality is that if a company is solid and pays big dividends, people will notice and bid up its price. Before long, the stock will become expensive and its yield will drop.
Fortunately, for those willing to dig into the not-so-hot sectors of the stock market, it’s still possible to find safe dividend yields that are substantially higher than the market average. Over the past several months, a beaten-down energy stock has caught my attention: Dominion Energy Midstream Partners LP (NYSE:DM).
As the name suggests, Dominion is in the midstream energy business. Structured as a master limited partnership (MLP), the company was created by Dominion Energy Inc (NYSE:D) to own, operate, and grow a portfolio of natural gas terminaling, processing, storage, and transportation assets—among other assets.
In today’s market, the No. 1 reason to consider DM stock is to collect its oversized dividends. With a quarterly distribution rate of $0.351 per unit, the partnership offers investors an annual yield of 8.6%.
Falling DM Stock Prices
Of course, as I mentioned earlier, Dominion Energy Midstream Partners hasn’t been a market favorite lately. In fact, its unit price performance has been downright terrible. Over the past six months—a period when both the S&P 500 and Nasdaq Composite indices surged past their all-time highs—DM stock plunged more than 35%.
The main factor behind the stock’s downturn was a change in policy from the Federal Energy Regulatory Commission (FERC). On March 15, 2018, the FERC announced that it would no longer allow interstate natural gas and oil pipeline operators to recover an income tax allowance in cost of service rates. (Source: “FERC Revises Polices, Will Disallow Income Tax Allowance Cost Recovery in MLP Pipeline Rates,” Federal Energy Regulatory Commission, March 15, 2018.)
The market interpreted this as seriously bad news for midstream energy partnerships. And the unit price of Dominion Energy Midstream Partners took a huge hit. According to management, however, the situation at this partnership might not be as bad as its unit price movement suggested.
In response to the FERC’s policy change, parent company Dominion Energy Inc said, “Regarding Dominion Energy Midstream Partners, the company does not anticipate any revenue reductions in the 2018 to 2020 time period due to FERC’s actions and is still evaluating any long term impacts and their timing.” (Source: “Dominion Energy Affirms Earnings Guidance, Credit Objectives,” Dominion Energy Inc, March 19, 2018.)
Dominion Energy Midstream Partners LP Provides an Increasing Income Stream
Now, you are probably thinking that Dominion Energy Midstream Partners is just another ultra-high yielder that obtained its status through a falling stock price. But that’s not really the case. In fact, another major reason why DM stock can offer such a high yield is the growth in the partnership’s actual payout.
You see, when the MLP was created back in 2015, its first payment was $0.1389 per unit, which reflected a prorated amount corresponding to the minimum distribution rate of $0.175 per unit specified in the partnership agreement. Since then, the partnership has increased its payout every single quarter. (Source: “Distribution History,” Dominion Energy Midstream Partners LP, last accessed August 31, 2018.)
This was a period of subdued commodity prices, and dividend cuts weren’t common in the energy sector. And yet, Dominion Energy Midstream Partners was still giving investors a pay raise every three months.
From a minimum quarterly distribution rate of $0.175 per unit to today’s $0.351 per unit, DM stock’s per-unit payout has more than doubled.
Is the Dividend Safe?
The best part is, despite all the distribution hikes, the partnership still has more than enough resources to cover its payout. Last year, Dominion Energy Midstream Partners generated $178.2 million of distributable cash flow, representing a whopping 68% increase over the prior year. And since it paid total distributions of $137.8 million for the year, the partnership had a safe distribution coverage ratio of 1.3 times. (Source: “Dominion Energy Midstream Partners Announces Fourth-Quarter and Full-Year 2017 Earnings,” Dominion Energy Midstream Partners LP, January 29, 2018.)
In the first half of 2018, Dominion Energy Midstream Partners’ distributable cash flow came in at $101.4 million, up another 19.6% year-over-year. Given its total distributions of $86.7 million paid for the first six months of the year, the partnership achieved a distribution coverage ratio of almost 1.2 times, leaving a margin of safety. (Source: “Dominion Energy Midstream Partners Announces Second-Quarter 2018 Earnings,” Dominion Energy Midstream Partners LP, August 1, 2018.)
With a safe yield of 8.6%, DM stock deserves the attention of income investors.