5 High-Yield Dividend Stocks to Watch

Energy master limited partnerships (MLPs) are well known for offering enticing high-yield distributions. However, those high yields often come with a higher level of risk. That's certainly the case with these five midstream companies. While each one offers mouthwatering payouts and intriguing upside, they also have at least one issue to address before investors should consider buying, which is why these names should only go on a watch list for now.

Not there yet

Buckeye Partners (NYSE: BPL) is coming off an abysmal 2018 in which it lost nearly half its value. Buckeye's biggest problem was its overly ambitious expansion efforts, which led it to take on too much debt to fund growth. That pushed its leverage ratio too high, making it difficult to access the capital it needed to continue expanding while also paying its high-yielding dividend. The company had to take drastic action to shore up its finances, including selling assets and slashing its payout 40%, though even with that reduction it still yields an enticing 8.8%. While those moves have helped improve the company's financial profile so that it can fund new expansion projects, it's not yet to the point where it can resume distribution growth. Therefore, investors should keep an eye on Buckeye's progress and wait until it's able to start returning more cash to investors before buying.

Still too concentrated

Bakken Shale-focused oil producer Oasis Petroleum formed Oasis Midstream Partners (NYSE: OMP) a couple of years ago to build out the midstream infrastructure needed to support its growing production in that region. Those expansions should enable Oasis Midstream to increase its distribution to investors -- which currently yields 9% -- at a 20% annual rate through 2021. However, as enticing as that sounds, Oasis Midstream is almost entirely reliant on not only one main customer but also one region to drive growth. That makes it riskier than most other midstream companies with greater diversity. While Oasis Midstream does have a few third-party customers on its systems, it needs more diversification to enhance its appeal to income-focused investors who prefer less risk. It can do that by not only signing up more new customers to its existing assets but also eventually following its parent into the faster-growing Permian Basin.

Lots of work to do

Summit Midstream Partners (NYSE: SMLP) shares many unfortunate similarities with Buckeye Partners. That's why the company recently had to follow in its footsteps by selling a non-core asset and slashing its distribution in half -- down to a still enticing 11% -- to shore up its financial profile. Summit Midstream will probably need to sell some more non-core assets in the future so that it can pay back its parent for a previous acquisition as well as fund expansion projects, including a potentially major pipeline project to support ExxonMobil. While Summit Midstream has a long road ahead of it, the income potential makes it worth watching.

Getting better, but still not where it needs to be

NuStar Energy (NYSE: NS) has also slashed its distribution and sold assets in recent years to shore up its financial profile. Those efforts enabled the company to deliver much-improved financial metrics in 2018 as it covered its now 9%-yielding distribution by a comfortable 1.42 times while leverage has come down to a much lower level. However, 2019 will be a heavy investment year for NuStar Energy, which will cause those metrics to weaken a bit until new projects come online and start generating cash. Investors should keep an eye on NuStar until it gets over this hump.

An uncertain future

TC Pipelines (NYSE: TCP) also had to slash its payout recently, but not entirely for the same reason as the others on this list. In TC Pipelines' case, a regulatory rule change made it unclear how much money the company would continue to collect from its pipelines. That led TC Pipelines to reduce its payout so that it could retain more cash to bolster its financial profile. Another outcome of the rule change is that TC Pipelines isn't likely to buy additional pipelines assets from its parent, Canadian energy infrastructure giant TransCanada. Instead, it plans to invest in organic expansion projects on its existing systems. This business model shift will take time to bear fruit, which is why investors should keep TC Pipelines -- and its 7.2%-yielding payout -- on their watch list for now.

Interesting options for income seekers to watch

All five of these MLPs offer well above average yields. The problem is that each one has some issues they need to address to ensure those payouts are on solid ground. That's why investors should wait and watch before buying.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.