Lock in a Safe Dividend Yield of 10.3%
A High-Yield Opportunity You Likely Haven’t Considered
In today’s market, one of the best places to find high-yield stocks is the energy sector.
Of course, I’m not talking about the drillers. Because of the volatility in commodity prices, the exploration and production business can carry a significant amount of risk.
Midstream businesses, on the other hand, could offer much more stability. Over the last several months, one midstream energy partnership has caught my attention: KNOT Offshore Partners LP (NYSE:KNOP).
Formed in 2013, KNOT Offshore Partners was created to operate and acquire shuttle tankers under long-term contracts. These tankers help energy companies transport crude oil and condensates from their offshore oil fields to onshore terminals and refineries.
Operating oil tankers may not be the most exciting business, but note this: since KNOP stock’s initial public offering in April 2013, the partnership has achieved a fleet utilization rate of 99.6%. Thanks to the stability in KNOP’s business, the partnership can have a generous distribution policy.
Today, KNOT Offshore Partners pays quarterly distributions of $0.52 per unit, which gives KNOP stock a staggering annual yield of 10.3%.
Now, I know what you are thinking: “In a market where most companies pay less than four percent, a double-digit yield could simply be a sign of trouble.” However, that’s not really the case for this high-yield stock.
Just take a look at the partnership’s financials and you’ll see what I mean. In the third quarter of 2017, the partnership grew its total revenue by seven percent sequentially to a new all-time high of $58.2 million. The bottom line was even more impressive; KNOP’s net income came in at $21.1 million for the third quarter, up 25% from the $16.9 million earned in the second quarter. (Source: “KNOT Offshore Partners LP Earnings Release – Interim Results For The Period Ended September 30, 2017,” KNOT Offshore Partners LP, November 3, 2017.)
At the same time, KNOP also generated a highest-ever quarterly distributable cash flow of $24.0 million. This allows the partnership to achieve its highest ever distribution coverage ratio of 1.46 times, leaving a wide margin of safety.
Here’s the best part: despite the massive downturn in oil prices over the last several years, KNOP stock managed to raise its payout to dividend investors. From its initial quarterly distribution rate of $0.3750 per unit (its first actual payment was a prorated amount of $0.3173 per unit), to today’s $0.520 per unit, KNOT Offshore Partners’ payout has grown by 39%. (Source: “Dividend Policy and History,” KNOT Offshore Partners LP, last accessed February 12, 2017.)
With a stable business and a safe yield of 10.3%, KNOP stock deserves the attention of income investors.