All too often, income-seeking investors pass over stocks that have lower current yields in favor of those that pay more right now. That approach, however, can cause investors to miss opportunities to collect a much higher income stream down the road from companies that can quickly grow their payouts. That growth can be quite substantial, with some companies on pace to more than double their dividends in just a couple of years. Two great options that stand out are natural gas pipeline companies Kinder Morgan (NYSE: KMI) and Antero Midstream (NYSE: AM).
On the cusp of becoming a high-yield stock
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Kinder Morgan currently yields around 3.1%, which, while above the market's average, might not appeal to some yield-seekers. However, what those yield-focused investors might not realize is that Kinder Morgan is a high-yield stock that's hiding in plain sight. That's because the energy infrastructure giant expects to boost its payout 60% this year. That means investors who buy today aren't locking in a 3.1% rate but a 5% forward yield. Driving that increase is the company's strengthening financial position, which allows it to increase the percentage of cash flow it pays out from 25% last year to 40% in 2018.
But with nearly $12 billion of high-return expansion projects under way, the company has the fuel to increase its payout by another 25% next year and a further 25% in 2020 while still maintaining a conservative payout ratio of around 50% of cash flow. This forecast implies that those who buy today would collect a 7.8% yield in three years, which is more than double the current dividend rate. That's upside investors will miss if they focus solely on a company's current payout rate and not the growth potential it has coming down the pipeline.
High-octane income growth
Antero Midstream Partners' current distribution rate is around 5.4%, which might be a bit more attractive to yield-seekers. However, like Kinder Morgan, there's a lot more to this income story. For starters, Antero Midstream expects to raise its distribution by 28% to 30% this year. The company also estimates that it will cover that higher rate with cash flow by a comfortable 1.25 to 1.35 times, well above average for a master limited partnership. But this year's growth rate is only the beginning, since Antero expects to grow its payout at that nearly 30% clip through 2020 and believes it can increase it another 20% annually in 2021 and 2022, while still maintaining conservative coverage above 1.1 five years from now. Fueling Antero Midstream's high-octane growth rate are the $2.7 billion of high-return expansion projects the company expects to complete over the next five years.
This outlook implies that investors who buy Antero Midstream today could see their yield increase to as much as 15% by 2022, nearly triple what they'd earn this year. That means investors could turn a small up-front investment into a lucrative cash flow stream five years from now.
A two-for-one special
Kinder Morgan and Antero Midstream are great income options for investors because they pay decent yields now that will grow exponentially over the next few years. Even better, their stock prices should rise with those rapidly increasing dividends, potentially enabling investors to earn market-beating returns.
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Matthew DiLallo owns shares of Kinder Morgan and has the following options: short March 2018 $17 puts on Kinder Morgan and short June 2018 $25 puts on Antero Midstream Partners. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.