This High-Yield Dividend Stock Appears Poised for High-Octane Growth

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It's not often that investors can get the best of both worlds by finding a high-yield stock with a high growth rate. However, that's exactly what BP Midstream Partners (NYSE: BPMP) offers. The master limited partnership (MLP) not only pays an attractive 8.4%-yielding distribution, but the company firmly believes it can grow that payout at a mid-teens rate through at least next year. That potentially sets investors up to earn some high-octane total returns.

A big yield backed by big oil

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Oil giant BP (NYSE: BP) formed BP Midstream Partners in late 2017 to acquire and operate its U.S. midstream assets. BP seeded its MLP with interests in several onshore and offshore oil, natural gas, and refined products pipelines systems backed by long-term, fee-based contracts. Those agreements supply BP Midstream with predictable cash flow, the bulk of which it uses to pay its lucrative distribution.

BP Midstream's portfolio generated enough cash last year to cover its high-yielding distribution by a comfortable 1.21 times, including 1.29 times during the fourth quarter. That increasing cushion came even though the company boosted its payout by a mid-teens rate last year. As a result, the company was able to retain some excess cash to further bolster its financial profile so it can fund growth-focused investments.

Fueled up for fast-paced growth

BP Midstream used its financial flexibility to complete its first drop-down transaction with BP last October. BP Midstream paid $468 million for interests in two pipeline systems and a stake in a refined products terminal joint venture. That deal, when combined with the organic growth of the company's existing portfolio, will give it the cash flow to increase its distribution by a mid-teen rate again this year.

BP Midstream currently has enough cash flow cushion to easily support another 5% to 6% distribution increase next year. However, the company believes it can use a combination of excess cash and additional borrowings to complete another transaction with BP. It's aiming to make a deal that would support mid-teens distribution growth again in 2020 while staying within its targeted financial metrics. BP currently holds stakes in several midstream assets that it could drop down to its MLP, including onshore and offshore pipelines, storage tanks at its refineries, and its distribution and business-to-business marketing operations.

BP controls enough midstream assets that it could support steady growth at its MLP for the next several years, providing BP Midstream can secure attractive financing for future transactions. On top of that, BP Midstream's offshore pipelines in the Gulf of Mexico have significant organic growth potential due to recent discoveries near its existing operations. As projects to tap those resources advance, it could bring additional growth opportunities to BP Midstream. These two growth drivers could provide BP Midstream with the fuel to continue growing its payout at a healthy rate for years to come.

A two-for-one special

The main attraction at BP Midstream is its high-yielding distribution. Not only does the company support that payout with conservative financial metrics, but it has the backing of BP. On top of that, the company offers investors fast-paced growth for at least the next two years. It has already locked up double-digit distribution growth this year and should be able to do the same in 2020 with the support of BP. That combination of income and growth has BP Midstream positioned to richly reward its investors in the coming years, making it an intriguing opportunity worth considering.

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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.