SEP Stock: A Dividend Growth Stock from the Energy Sector?
Collect Rising Payouts from SEP Stock a 6.5% Yielder
When it comes to dividend growth investing, people usually think of recession-proof industries such as consumer staples and healthcare. Indeed, if you take a look at companies with the longest track records of dividend increases, you’ll find that many of them come from industries that are resilient to economic downturns.
The thing is, though, everyone loves these recession-proof companies. And because of their popularity, these stocks don’t offer a yield high enough these days. For instance, the ProShares S&P 500 Dividend Aristocrat ETF (BATS:NOBL), an exchange-traded fund that focuses exclusively of S&P 500 companies that have raised dividends for at least 25 years, is currently yielding 1.9%.
However, there are lesser-known companies that are also capable of paying increasing dividends. And because they are not as highly sought after as the blue-chip names, some of them can offer much more substantial dividend yields.
Spectra Energy Partners LP (NYSE: SEP), for instance, is a top dividend growth stock currently yielding 6.5%. Headquartered in Houston, Texas, Spectra is a master limited partnership (MLP) that owns and operates energy pipelines and storage facilities.
Now, you may be wondering how an energy partnership can be a dividend growth stock, given what has happened since oil prices crashed in the summer of 2014. Well, while it’s true that many energy companies are still deep in the doldrums, Spectra is not one of them. In fact, the partnership has been consistently raising its payout despite the downturn in oil and gas prices.
Here is Spectra’s per unit distribution history since 2009:
Steady Dividend Growth
Source: “Growth from a Position of Strength,” Spectra Energy Partners LP, last accessed September 22, 2017.
In 2009, the partnership paid cash distributions totaling $1.51 per unit. In 2016, the payout was $2.63 per unit. That’s an increase of 74%.
The reason why this energy partnership managed to achieve such impressive payout growth lies in the nature of its business. Spectra owns and operates over 15,000 miles of pipelines, as well as storage facilities capable of storing 5.6-million barrels of crude oil and 170-billion cubic feet of natural gas.
The business is quite straightforward: energy companies pay Spectra a fee to transport and store crude oil or natural gas. Spectra does not have any drilling operations, so it doesn’t have to worry about commodity prices. In fact, the partnership’s entire business is fee-based.
Of course, there is still volume risk. If commodity prices drop to a point where energy companies don’t have as much oil and gas for Spectra to move and store, its business would decline.
However, even volume risk has been minimized. More than 90% of the partnership’s asset revenues come from fees that reserve capacity on its pipelines and storage terminals. This way, even when usage declines, the impact on SEP stock’s financials would be limited.
Bigger Payouts on the Way
The partnership is well-positioned to continue its track record of dividend growth. Spectra expects its total distribution to be $2.83 per unit for full year 2017, which would represent a 7.6% increase from last year. It would also maintain a distribution coverage ratio of between 1.05 times and 1.15 times, leaving a margin of safety.
For 2018, the partnership expects another seven-percent increase to its cash distribution rate to $3.03 per unit. So for investors of SEP stock which is a dividend growth stock, the best could be yet to come.