A High-Yield Stock You Likely Haven’t Considered
Regular readers of Income Investors would know that I like to look for high-yield opportunities in out-of-favor sectors. One of those sectors is midstream energy.
You see, ever since oil prices crashed in the summer of 2014, there has been a huge sell-off in energy stocks. Even midstream operators that run fee-based businesses suffered huge losses in their share prices. As a result, they now offer some of the highest dividend yields in the stock market.
Of course, dividend yield is not the only criterion when choosing income stocks. Companies that are worth considering for income investors should also have good dividend safety.
Over the last several months, one particular high-yield energy stock has caught my attention: Dominion Energy Midstream Partners LP (NYSE:DM).
Headquartered in Richmond, Virginia, Dominion Energy Midstream Partners LP is a master limited partnership (MLP). It was created by power and energy company Dominion Energy Inc (NYSE:D) to own, operate, and grow a portfolio of natural gas terminaling, processing, storage, and transportation assets.
Dominion Energy Midstream Partners completed its initial public offering (IPO) in October 2014, which was not exactly the best time to enter the energy business. However, the partnership still managed to return a huge amount of cash to shareholders through its rising distribution stream.
Consider this: When DM stock went public, it had a minimum quarterly distribution rate of $0.175 per unit. Its first quarterly cash distribution of $0.1389 per unit was prorated for the partial quarter following its IPO. Since then, Dominion Energy Midstream Partners has raised its cash payout every single quarter. That’s 12 consecutive quarterly dividend increases! (Source: “Distribution History,” Dominion Energy Midstream Partners LP, last accessed April 23, 2018.)
The latest distribution hike came earlier this month, when the board of directors of Dominion’s general partner declared a first-quarter 2018 cash distribution of $0.3340 per unit. This represented a five percent increase sequentially and a 22% increase year-over-year. (Source: “Dominion Energy Midstream Declares Quarterly Cash Distribution; Increases Distribution by 5 Percent Above Fourth-Quarter Distribution,” Dominion Energy Midstream Partners LP, April 20, 2018.)
Trading at $14.80 apiece, DM stock offers an annual distribution yield of nine percent.
Of course, a high-yield stock in the energy sector doesn’t sound like the safest bet in today’s market. However, if you take a look at what Dominion Energy Midstream Partners has been doing, you’d see that its generous payouts are backed by rock-solid financials.
In the fourth quarter of 2017, the partnership generated $47.6 million of distributable cash flow while declaring $39.1 million of total distributions. That translated to a distribution coverage ratio of 1.22 times, meaning that Dominion generated 22% more cash than what was needed to meet its distribution obligations. (Source: “Dominion Energy Midstream Partners Announces Fourth-Quarter and Full-Year 2017 Earnings,” Dominion Energy Midstream Partners LP, January 29, 2018.)
For the entire year, Dominion Energy Midstream Partners generated $178.2 million in distributable cash flow. Considering that it declared total distributions of $137.8 million during this period, the partnership achieved a distribution coverage ratio of 1.29 times for full-year 2017. This has also left a sizable margin of safety.
With a safe nine-percent yield and quarterly payout increases, DM stock is a rare find in today’s midstream energy sector.