There's a misplaced belief among investors that they can earn the highest returns in riskier investments. Historically, however, the best gains have come from investing at the lower end of the risk spectrum, which are companies that pay a growing dividend. It's not even close. Since 1972, the stocks of companies that increased their payout each year generated a total average annual return of 9.9% while those that didn't pay one only returned about 2.4% per year, according to a study by Ned Davis Research. Even better, these dividend growth stocks outperformed with significantly less volatility than non-payers.
While simply paying a growing dividend could provide the fuel needed to outperform, stocks growing their payouts at a faster pace should have the edge in leading the way. Here are two that plan on delivering at least a 20% increase this year -- and can continue growing it at a fast pace in future years -- which could enable them to achieve market-crushing total returns.
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A monster opportunity
Global oil and gas giant Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B) formed Shell Midstream Partners (NYSE: SHLX) in late 2014 as a master limited partnership (MLP) to operate, develop, and acquire pipelines and other midstream infrastructure to support Shell's U.S. growth. Since that time, Shell has slowly dropped down portions of its midstream assets to Shell Midstream Partners, which has significantly grown the company's cash flow and ability to pay distributions. In fact, the two companies have already combined on more than $3 billion in transactions, which have more than doubled Shell Midstream's payout so that it now yields an attractive 5%.
However, Shell Midstream still has plenty of growth left in the tank. The company expects to increase its payout by another 20% this year, supported by recent drop-down transactions with Shell. However, Shell still has an enormous supply of midstream assets that it could drop down to Shell Midstream. For perspective, the $3 billion in assets it had dropped down through last year generate about $400 million in annual earnings. However, Shell has assets generating up to $2 billion of profit each year either currently operating or under construction and gets another $1 billion of annual earnings from assets that it's evaluating for future dropdowns. That pipeline of opportunities should provide Shell Midstream with the fuel to keep growing its payout at a healthy clip for years to come.
The final year of the plan doesn't mean dividend growth will cease
Refining giant Phillips 66 (NYSE: PSX) formed MLP Phillips 66 Partners (NYSE: PSXP) in late 2012 to drive its midstream growth initiatives. Much like Royal Dutch Shell's plans with its MLP, Phillips 66 wanted to steadily drop down its logistics assets to Phillips 66 Partners. The company planned to sell them over five years, which would enable Phillips 66 Partners to increase its payout at a 30% compound annual clip. The companies have been highly successful thus far, with Phillips 66 Partners' payout expanding at a 32% compound annual rate since its IPO and now yields a generous 5.1%.
While the companies expect to maintain their current 30% compound annual clip this year, they don't have a distribution growth forecast beyond 2018. However, Phillips 66 Partners has the fuel to keep growing in future years because it has transitioned from acquiring assets its parent owns to investing in organic growth projects. The company currently has several expansions under way, including investing in four pipeline projects that should wrap up over the course of this year and a $200 million unit at a Phillips 66 refinery that should be complete at the end of 2019. Those projects will provide the company with the cash flow to keep growing its payout at a fast pace over the next few years.
The right formula for outperformance
With high-yielding payouts above 5%, Phillips 66 Partners and Shell Midstream Partners are already well on their way to delivering a compelling total return to investors in the coming years. Add to that at least 20% income growth this year, and the likelihood of a high growth rate in future years, and these companies should have the fuel to deliver returns that could significantly outpace the market.
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