This Energy Stock Is a Yield Hunter’s Favorite (It Pays 10.7%)
A Rare Find in Today’s Market
Hunting for yield can be frustrating at times.
And it’s not because you can’t find generous companies; there are plenty of ultra-high yielders in today’s market. Go to any of the financial web portals, use its stock screener, and you’ll instantly see companies with yields north of 10%.
The problem lies in the reliability of those yields—or rather, the lack of it.
As income investors, we want to collect dividends not just for a quarter or two, but indefinitely into the future. While you can find plenty of low-yield companies with durable dividends, things get a lot riskier as soon as you climb up the yield ladder.
Rather than expecting dividend hikes, investors who put their money in double-digit yielders would be happy if they manage to avoid dividend cuts.
The expectations are set pretty low, to say the least.
This also means that when you finally found a high-yield stock with a safe payout, it feels pretty awesome.
Today, I want to share that great feeling with you by looking at Delek Logistics Partners LP (NYSE:DKL).
As a master limited partnership (MLP) headquartered in Brentwood, Tennessee, Delek Logistics is not exactly a hot ticker. In fact, if you don’t follow the energy industry closely, you’ve probably never heard of it.
The partnership was created by Delek US Holdings Inc (NYSE:DK) to own, operate, acquire, and construct crude oil and refined products logistics and marketing assets.
Today, Delek Logistics helps energy companies gather, transport, and store crude oil and market, distribute, transport, and store refined products. The partnership serves Delek U.S. Holdings as well as third-party customers.
A Staggering 10.7% Dividend Yield
DKL is a true high-yield stock. With a quarterly distribution rate of $0.81 per common limited partner unit, the partnership offers an annual yield of 10.7%.
Like I said, this is a “feel good” high-yield stock, meaning that while it offers a payout way bigger than the vast majority of stocks trading in today’s market, it won’t keep investors in DKL stock up at night, wondering whether a payout cut is on the way.
You see, the main reason why investors have second thoughts about investing in oil and gas companies is that their business can be closely tied to commodity prices. For instance, if oil prices are down—like what’s been happening in the last several months, oil producers will have to sell their output for less.
The neat thing is, while Delek Logistics Partners operates in the oil industry, it provides services largely through long-term, fee-based contracts with minimum-volume commitments. As a result, the partnership can generate relatively stable cash flows despite commodity price volatility.
To give you an idea, the company earned 73% of its gross margin in the third quarter of 2018 from minimum volume commitments. (Source: “Investor Presentation,” Delek Logistics Partners LP, last accessed January 31, 2019.)
Thanks to this solid business model, Delek Logistics Partners can outearn its distributions even with commodity price headwinds.
Delek Logistics Partners LP: Is the Payout Safe?
Analysts often compare a company’s dividends to its earnings to evaluate the safety of the payout, but in the case of MLPs, a more appropriate comparison is between distributions and distributable cash flow.
For the third quarter of 2018, Delek Logistics Partners generated $32.4 million in distributable cash flow while paying unitholders $26.0 million in cash distributions. That gave the partnership a distribution coverage ratio of 1.25 times. (Source: “Delek Logistics Partners, LP Reports Third Quarter 2018 Results,” Delek Logistics Partners LP, November 6, 2018.)
Therefore, DKL outearned its distributions by 25% for the quarter.
For the first nine months of 2018, Delek Logistics Partners’ distributable cash flow came in at $94.1 million. Given its total cash distributions of $74.9 million paid for the period, the partnership’s distribution coverage ratio came out to 1.26 times.
However you look at it, DKL has built a margin of safety in its payout.
Is The Best Yet to Come?
At this point, you can probably see why I’m digging this little-known stock. The partnership offers a double-digit yield at the current price, and its business has no problem generating enough cash to support the generous distribution policy.
But that’s not all, because if an investor purchases DKL stock today, they’ll likely collect even bigger distribution checks in the future than what the current yield suggests.
You see, management of Delek Logistics Partners LP is targeting a distribution per unit growth rate of at least 10% annually through 2019.
In the past, the partnership was pursuing its distribution growth target with quarterly payout increases. The latest one, which was announced last month, was a 2.5% increase from its third quarter 2018 distribution of $0.79 per share to the current level of $0.81 per share. (Source: “Delek Logistics Partners, LP Increases Quarterly Cash Distribution to $0.81 per Common Limited Partner Unit,” Delek Logistics Partners LP, January 24, 2019.)
Looking further back, you’d see that Delek Logistics Partners has raised its cash distribution every quarter since its initial public offering in 2012.
That’s right, despite the downturn in oil prices over the last several years, DKL stock investors got bigger dividend checks in the mail every three months.
Given this kind of track record and the partnership’s solid financials, management will likely achieve its 10% distribution growth in 2019 through quarterly distribution increases—just like what it did before.
Adding in the already impressive 10.7% yield, DKL stock represents a serious opportunity for yield hunters.