Dividend Increases Up To 25% Could Be In The Cards For These Energy Stocks

Before the energy commodity and stock sector crash in 2015, energy midstream stocks paid steadily growing dividends that income investors loved. The steady stream of dividend increases propelled share higher. It was a strategy that worked for years, buy energy midstream stocks with attractive yields and growing dividends to generate great total return year after year. Until it stopped working.

In 2015 energy sector stock prices crashed, taking down the business model used by the midstream companies. They would issue debt and equity to fund growth projects (growth Capex), and as the projects came online, the revenue allowed the dividends to keep growing.

After the crash, companies in this sector were not rewarded with rising share prices if management teams continued to grow dividends. Share prices bottomed in early 2016 and stayed down through 2019.

With the dividend growth game broken, midstream companies changed their strategies. For the last four years, companies have been cutting dividends to pay down debt and restructuring businesses to use internally generated cash flow to fund growth Capex.

Before 2015, distributable cash flow (DCF) coverage of 1.05 to 1.10 times the distributions was viewed as adequate. Now companies target DCF coverage of 1.3 to 1.5 times or higher.

Now that debt loads are reduced and cash flow coverage is at levels that support both Capex and dividend payments, energy midstream companies are in a position to resume dividend growth with meaningful dividend increases. Large dividend increases can propel stock prices higher, giving the double benefit of growing income and capital gains. Here are three energy midstream companies that should announce big dividend increases soon.

In 2016, Kinder Morgan, Inc (KMI) slashed its dividend by 75%, from $0.51 per share down to $0.125. The rate stayed at 12.5 cents for two years.

It was increased to $0.20 per share in 2018 and up another 25% to $0.25 per share in 2019.

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