Investors who want to generate some extra income have a bounty of options since there are hundreds of dividend-paying stocks out there. However, some of the more compelling opportunities come from lesser-known names because these companies are much earlier in their life cycle and therefore offer not only a lucrative current income stream but untapped upside from future growth. Three such hidden gems are BP Midstream Partners (NYSE: BPMP), Hess Midstream Partners (NYSE: HESM), and Oasis Midstream Partners (NYSE: OMP). Each offers an attractive current yield with compelling growth prospects that could potentially generate exceptional total returns in the coming years.
Backed by big oil
While most investors know oil giant BP (NYSE: BP), few have probably heard about its master limited partnership, BP Midstream Partners. That's not surprising since BP just took the company public last October. However, while it's not a well-known name yet, it is one that income investors should put on their radar since it currently offers a well-above-average yield of 5.1%, which it comfortably covered with cash flow by 1.3 times last quarter.
Furthermore, BP Midstream Partners has high-octane growth up ahead. While the company's existing portfolio of pipelines has enough embedded growth to support distribution increases of 5% to 6% per year through 2020, the company believes it can grow at a much faster rate. That's because BP plans to steadily drop down midstream assets to its MLP, which should give it the cash to boost its payout at a mid-teens annual rate in the coming years. That growing income stream could make BP Midstream a gold mine for income investors.
Building out a midstream growth machine
Hess Midstream Partners is another MLP created by an energy giant, in this case Hess (NYSE: HES), to house its midstream assets. The company has only been public for a little over a year, so it, too, is very early in its life cycle. However, it offers a more attractive starting yield of 6.5%, which it covered with cash flow by a healthy 1.25 times last quarter.
Hess Midstream Partners also anticipates that it can deliver fast-paced growth. The company currently believes it can increase its distribution at a 15% annual rate while maintaining at least a 1.1 times coverage ratio. While the company does have the right to acquire the remaining midstream assets owned by Hess, the bulk of Hess Midstream's growth will come from organic expansion opportunities. The company recently signed a 50-50 joint venture with Targa Resources to build a new natural gas processing plant in North Dakota, and it has plenty of spare capacity on its existing assets to support the growth of Hess as it continues ramping production. Because of that, Hess Midstream looks like it could turn into an excellent income growth stock.
A big-time yield with an even bigger growth rate
Oasis Midstream Partners is also an MLP created by an oil company, though its parent, Oasis Petroleum (NYSE: OAS), isn't quite as well known as the other two. It's also new to the market since it just went public last year. However, it does have two things that set it apart.
First, Oasis Midstream Partners offers a much higher starting yield of 8.4%. That's due in part to the fact that the company currently pays out more of its cash flow since its distribution coverage ratio was a tighter 1.1 times last quarter, though the company does see that rising to 1.2 times by year-end and growing above 1.3 times in early 2019. That rising distribution coverage will come even as Oasis Midstream Partners expects to grow its payout at a faster pace of around 20% annually, driven by a combination of organic expansion projects and dropdown acquisitions from Oasis. That mix of a higher-yield and faster-paced future growth makes Oasis Midstream an income stock that investors should at least put on their watchlist.
Just getting started
Because these MLPs are so early in their life cycle, few investors have come across them yet. As a result, the market has yet to fully realize their growth potential, which is why they offer such attractive starting yields given their growth projections. That income with upside could provide them with the fuel to deliver big-time total returns for investors in the years ahead.
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