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These High Yield Energy Stocks are Unexpected Tax Winners

01/29/2018 5:00 am EST


Tim Plaehn

Investment Research Analyst, Investors Alley

The energy infrastructure sector requires a lot of capital to develop assets. The energy infrastructure sector develops and operates assets such as pipelines, processing plants and terminals, explains Tim Plaehn, editor of Investors Alley The Market Cap.

This is not a sector that you might expect to benefit from the new corporate income tax rates. However, recent changes in the sector will allow dividend income investors to reap some better than expected yields and dividend growth.

The energy sector bear market that started in 2015 and lasted into 2017 forced many MLPs to restructure as or into corporate entities. Now it appears that these companies are poised to see significant benefits from the lower corporate income tax rate.

Here are three energy infrastructure companies organized as corporations. These businesses are likely to pass lower corporate income tax expense through to investors as higher dividends or faster dividend growth.

Williams Companies Inc. (WMB) operates primarily as the general partner of Williams Partners LP (WPZ). Williams Partners owns and operates one of North America’s largest natural gas gathering, processing and pipeline networks.

It currently does not pay much corporate income tax, but that bill will grow as growth projects start to generate revenue between now and 2020.

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After several years of restructuring the WMB-WPZ relationship, the WMB dividend is poised to resume growth. The lower corporate tax rate could allow the dividend to grow by 20% plus per year. WMB currently yields 3.7%.

ONEOK, Inc. (OKE) completed the absorption of its controlled MLP on June 30, 2017. By eliminating the MLP overhead and other costs, ONEOK is better positioned to pay an attractive and growing dividend.

The company is a leader in the gathering, processing, storage and transportation of natural gas. It operates in the Mid-Continent, Williston, Permian and Rocky Mountain regions.

Before the lowering of the corporate income tax rate, ONEOK was expected to grow its dividend by 10% per year. With a lower tax bill, that growth rate could move into the low to mid-teens. OKE yields 5.3%.

Targa Resources Corp. (TRGP) rolled up its controlled MLP in early 2016, one of the first energy infrastructure corporations to “roll up” its publicly traded partnership. Targa is focused on natural gas liquids processing and transport.

The company also owns extensive Texas Coast energy product export terminals. Targa Resources has not increased its quarterly dividend since the fall of 2015. The lower corporate tax rate should allow it to soon return to a policy of dividend growth. TRGP yields 7.2%.

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