Most investors believe that high-yield dividend stocks automatically carry a higher risk profile. However, that's not always the case. That's because a stock's dividend yield is the per-share rate divided by the stock price. Thus, when stock prices come down, dividend yields rise.
That can be because investors are worried about the sustainability of an overly generous payout or the result of a company or sector being out of favor and having a depressed price. The latter is currently the case with energy master limited partnerships (MLPs), which trade at historically low valuations because of the volatility in the oil market in recent years. Because of that, the sector offers juicy yields.
Here are five top-quality MLPs with big-time payouts backed by rock-solid financials.
A big-time raise with more on the way
Plains All American Pipeline (NYSE: PAA) recently gave its investors a monster 20% dividend increase. That pushed the oil pipeline MLP's yield up to 5.9%. The company can easily afford that higher payout level since it will only consume about 57% of its cash flow, well below the comfort level of most MLPs. That leaves the company with ample excess to invest in high return expansion projects and further bolster its balance sheet. This conservative approach will enable Plains All American to grow cash flow while reducing its leverage ratio to a range of 3 to 3.5 times debt-to-EBITDA, which is top-tier level for an MLP. It'll also allow the company to continue increasing its payout by at least 5% annually in the near-term.
59 and counting
Enterprise Products Partners (NYSE: EPD) also recently gave its investors a raise, though it was much more modest at 2.3%. That was the MLP's 59th consecutive quarterly increase and helped nudge its yield up to 6%. Enterprise Products Partners backs that payout with one of the highest credit ratings among MLPs, which it supports with a low 3.5 leverage ratio. Furthermore, the company's payout ratio is right up there with Plains All American Pipeline, which provides it with enough excess cash to invest in expansion projects and fund a $2 billion repurchase program.
Shifting gears but plenty of growth ahead
Phillips 66 Partners (NYSE: PSXP) has also been steadily increasing its payout. The company recently achieved its goal of growing its distribution to investors at a 30% compound annual rate from its formation in 2013 through the end of 2018, fueled mainly by acquisitions from its parent, refining giant Phillips 66. That steady stream of raises -- 21 straight quarters overall -- have boosted the company's yield up to 6.4%. Phillips 66 Partners still only pays out about 72% of its cash flow in support of that high yield, and it has a top-notch balance sheet backed by a low 2.8 leverage ratio. The company therefore has ample financial flexibility to invest in expansion projects, which should give it the cash flow to continue increasing its payout, though likely at a slower pace.
Steady as a rock
Magellan Midstream Partners (NYSE: MMP) currently yields an enticing 6.5%. The MLP also has a long history of steadily increasing its payout, raising it 67 times since its formation in 2001, including by 8% last year. The company covers its high-yield distribution with cash flow by a comfortable 1.2 times. It's also tied with Enterprise Products Partners for the best credit rating among MLPs, which it backs with a low leverage ratio of 3. That healthy coverage and low leverage give Magellan Midstream the financial flexibility to invest in growth projects. The incremental cash flow from those expansions should support another 5% increase in its high-yield distribution this year.
A high yield with healthy growth
MPLX (NYSE: MPLX) leads the pack with an 8% yield. The MLP backs that payout with sustainable financials, including a conservative leverage ratio of 4 and comfortable 1.36 times coverage. That solid financial profile gives the company the flexibility to fund growth projects. Those expansions should enable MPLX to grow its already attractive distribution by about 6% per year in both 2019 and 2020. That would continue MPLX's streak of steadily increasing its payout, which it has done for the past 24 quarters.
A high yield now with even more income later
Each one of these MLPs pays an attractive dividend that yields more than 5%. They also have strong balance sheets and conservative payout levels. Those solid financial profiles not only enhance the long-term sustainability of their payouts but gives these companies the flexibility to invest in expansion projects that should boost their cash flows in the coming years. This growth sets each one of these MLPs up to continue increasing their distributions, meaning investors should collect even bigger paychecks in the future.
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Matthew DiLallo owns shares of Enterprise Products Partners and Phillips 66. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.