Yahoo Finance At More Than 7%, These 2 High-Yield Stocks Should Catch Your Attention
While any investor would love to find a stock that doubles overnight, most take much more time. For example, a stock that generates an average total annual return of 7% will double an investor's money in about a decade.
That clear path to a double is why some investors like buying ultra-high-yielding stocks -- because they don't require much, if any, capital gains to achieve that goal. While several companies pay well above average dividends, two with attention-grabbing yields of more than 7% are Shell Midstream Partners (NYSE: SHLX) and Targa Resources (NYSE: TRGP).
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A big yield backed by big oil
Shell Midstream Partners is a master limited partnership (MLP) created by oil giant Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B) to acquire and operate the company's U.S. midstream assets. The MLP currently owns interests in several onshore and offshore oil and gas pipelines backed by long-term contracts with Shell and other shippers. Those agreements provide the company with predictable cash flow that it uses to pay a cash distribution to investors that currently yields an eye-catching 7.7%. The company further supports that payout with a conservative financial profile, including a healthy coverage ratio of 1.2 times and a low leverage level.
However, as attractive as that current yield might be, it's only part of the draw. Shell Midstream expects that it can increase its payout at a mid-teens rate in 2019, supported in part by Shell, which is waiving a portion its management fee to help offset some near-term headwinds. The company should be able to continue increasing the payout at a healthy rate in the coming years as it acquires more of Shell's midstream assets and expands those it already owns.
With a strong balance sheet and healthy coverage ratio, it should have the financial flexibility to make the growth-focused investments needed to continue expanding cash flow and its distribution to investors.
High-octane growth ahead
Targa Resources currently pays an eye-popping 9% dividend. On the one hand, that payout's on shaking ground since Targa generated just enough cash to cover it last year. Also, it has a weaker financial profile than many peers due to its junk-rated credit, and higher direct exposure to volatile commodity prices compared with other energy midstream companies. Because of that, Targa had to get creative to secure financing for its large slate of expansion projects, including selling a 45% stake in an oil and gas gathering system in North Dakota's Bakken Shale earlier this year for $1.6 billion.
On the other hand, the company has been able to cobble together the funds to build several expansion projects that are nearing completion, including more than $2.5 billion in projects that should come on line by the second half of this year. That has it on track to grow earnings from $1.4 billion last year up to around $2 billion by 2020. This high-octane earnings growth should significantly improve the long-term sustainability of Targa's dividend while enhancing its financial profile. That sets the company up to potentially produce big-time total returns in the coming years.
Higher risk but much higher reward
If these two midstream companies can maintain their currently high-yielding payouts over the long term, they have the potential to double an investor's money in less than 10 years, and that's assuming no stock price appreciation. Either could shorten that time frame by growing their cash flow and dividends, which could also boost their stock values.
However, with that potential for a higher reward comes an elevated risk level. Shell Midstream, for example, needs some extra support from its parent Shell to achieve its growth plan, while Targa Resources must overcome its outsized exposure to commodity prices and weaker financial profile. Still, for those who are looking for investments that could double their money, these midstream companies seem as if they could have the fuel to do so in less than a decade.
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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Targa Resources. The Motley Fool has a disclosure policy.
