Get A Raise Every Quarter With These 3 High-Yield Dividend Stocks

Before the energy sector bear market that started in late 2014, which still lingers in the minds of investors, most energy midstream companies increased their dividends every single quarter. The crash in energy commodity prices and stock valuations forced many Boards of Directors to rethink their balance sheet practices and dividend policies. The number of energy midstream stocks that continue to increase their dividends every quarter has dwindled, but a handful remain.

Energy midstream, sometimes called energy infrastructures, are the companies that own energy commodity gathering, pipeline, storage, and terminal assets. These companies have contracted, fixed-fee revenue streams that are a lot more stable than the results from the upstream oil and gas producers or the downstream processing and refining companies. The steady revenue streams have allowed the midstream companies also to be stable dividend payers. Some stocks in the group have many years of dividend growth history.

The energy sector crash had a strong negative effect on growth plans in the midstream sector. With share prices down and yields up, companies were no longer able to effectively use equity issuance as currency to pay for growth projects.

Back in the good old days, a midstream company would finance a new project with a combination of equity and debt. The free cash flow generated by the midstream assets were almost entirely paid out as distributions to investors.

That party stopped with the sector crash, and now midstream companies retain more of their free cash flow to help pay for growth projects. In the early days of this decade, cash flow coverage (distributable cash flow or DCF) of 1.05 times was considered adequate and the norm. Now, the quality midstream companies have much higher DCF coverage of the dividends they pay.

A quick note before we get to the three midstream stocks to consider… Also, prior to 2016, most energy midstream companies were organized as master limited partnerships (MLPs), and investors received IRS Schedules K-1 for tax reporting. After a half-decade of restructuring, now less than half of the midstream companies continue as K-1 reporting MLPs.

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