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Plaehn's Pipeline Picks for Rising Yields

06/26/2019 5:00 am EST


Tim Plaehn

Lead Income Analyst, The Dividend Hunter

Next week we start a new quarter; income focused investors can look forward to a new round of dividend announcements and payments, suggests Tim Plaehn, income expert and editor of The Dividend Hunter.

A number of the companies in the energy infrastructure sector make dividend announcements in the early days of a new quarter, weeks before they report earnings for the quarter. Dividend announcements with dividend increases are “real” news that can give a nice boost to share prices.

Energy infrastructure, also called midstream services, was until a few years ago almost exclusively populated by companies organized as master limited partnerships (MLPs).

The energy sector from upstream, through midstream, to downstream went through a severe bear market in 2015-2016 after the price of crude oil crashed down to less than $30 per barrel. The midstream sector was forced into significant financial restructuring, which included numerous dividend cuts, or at least a suspension of dividend growth.

The restructuring in the sector is now complete. The midstream group is no longer exclusively K-1 reporting MLPs. There is close to an equal number of corporations or limited partnerships reporting tax information on IRS Form 1099.

Of more impact to your brokerage account, the days of dividend cuts are over and many companies in the sector have resumed dividend growth.

One appealing factor is that a lot of the companies have policies of increasing the dividend every quarter. It’s nice to see your investment income growing each and every quarter.

Here are three energy infrastructure stocks that will likely announce dividend increases in the early days of July.

Plains All American Pipelines LP (PAA) owns and operates the largest independent crude oil pipeline and storage network. It’s pipelines transport oil from the major upstream plays from Canada to Texas. Plains is a major crude oil gathering and transport force in the Permian basin.

The new Cactus II pipeline will start transporting oil from the basin in the third quarter. Capacity on the Cactus II will ramp up to 670,000 barrels per day. Plains cut its dividend rate in both 2016 and 2016.

Earlier this year, management announced the financial restructuring was complete and increased the dividend by 20%. I expect 5% to 8% annual dividend growth going forward with quarterly increases. The next dividend announcement should come within the first week of July. PAA yields 6.0%.

Enterprise Products Partners LP (EPD) is the largest MLP with a $63 billion market cap. The company owns pipelines and storage terminals for natural gas, NGLs, crude oil, petrochemicals and refined energy products.

It also owns 26 natural gas processing plants. To round out the assets is an 18 dock export facility.

Enterprise is one MLP that was able to continue to grow its distributions through the energy sector bear market.

The next dividend increase will be the 60th consecutive boost to the payout. The next, higher distribution will be announced in the first third of July. Look for a 1% increase. EPD currently yields 6.0%.

Tallgrass Energy LP (TGE) owns and operates interstate crude oil and natural gas pipelines. The current company is the result of the 2018 merger of an MLP and its publicly traded general partner. TGE is a 1099 reporting publicly traded partnership. The merger became official one year ago.

Tallgrass has increased its dividend every quarter, with a lot of variability in the size of the increase. Recent increases have been in the 2% to 3% range. Expect the dividend announcement in the week after the 4th of July long holiday weekend. TGE yields 9.5%.

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