“The Federal Reserve will hold its penultimate FOMC meeting on October 31-November 1, and the odds that they’ll institute another interest rate hike have just jumped. The September jobs report came in, showing employment levels far above the forecast – 336,000 new jobs in the month, compared to the 170,000 expected – and that means increased inflationary pressures. Analysts now put the odds of a quarter-percent rate hike at 29%.
The messages here are mixed. The jobs numbers look good – but increased employment also risks increasing wage inflation, which increases pressure on the Fed to fire their only weapon against inflation – further interest rate hikes. The Fed has already signaled that it will hold rates ‘higher for longer,’ and bond yields are hovering near 16-year highs. This, in turn, puts pressure on stocks, as investors go seeking the highest returns.
With all of this in mind, it’s probably time to consider getting into dividend stocks. These equities offer investors the advantage of a steady passive income no matter how the markets turn.
Goldman Sachs analyst John Mackay has tapped two high-yield payers as choices for investors to buy now. According to TipRanks’ database, these are Buy-rated stocks with dividend yields of at least 8%. Let’s take a closer look.
MPLX LP (MPLX)
We’ll start with a well-known name in the hydrocarbon midstream industry, MPLX. This company spun off from Marathon Petroleum more than a decade ago, to operate the parent company’s midstream transport assets – and today MPLX is a major player in North America’s oil and natural gas midstream niche, boasting a $35 billion market cap and a continent-spanning asset network.
That asset network includes a pipeline web, terminal points, and river fleet of tugs and barges. These transportation assets link production regions and wellheads with oil and gas storage facilities, tank farms, gas refineries, and, on the coast, export terminals. Finally, in addition to moving crude oil and natural gas, MPLX also has a hand in the transport and distribution of refined fuel products.
All of this is big business, and MPLX consistently generates $2 billion-plus in quarterly revenues. In the last quarter reported, 2Q23, the company saw a top line of $2.69 billion; this total was down 8.5% from the prior year, and missed the forecast by some $18.6 million. At the bottom line, however, the company’s EPS came in at 91 cents per share by GAAP measures, or 4 cents per share better than had been anticipated. The EPS figure was also 8 cents per share better than the 2Q22 result.
MPLX will release its next set of quarterly results this coming October 31, and there is one more metric that should interest dividend investors. The company’s Q2 distributable cash flow was reported as $1.315 billion – up some 6.3% and available to support the company’s common share dividend.
That dividend was last paid out on August 14, at a rate of 77.5 cents per share, and the annualized rate, of $3.10, gives an impressive yield of 8.8%. MPLX has a dividend history stretching back some ten years, during which it has been gradually raising the payment.
Goldman Sachs’ John Mackay sees the dividend as a selling point for investors here, and also part of a comprehensive ability, on the part of MPLX, to generate returns.
“MPLX maintains a high-quality asset mix, producing stable cash flows supported by minimum-volume commitments with MPC… Since repairing the balance sheet, management has been committed to a creating a premier capital return framework which now includes annual base distribution increases coupled with opportunistic buybacks. We ultimately see MPLX as a premier capital return vehicle vs the rest of our coverage universe, as steady and growing FCF generation supports sizable dividend increases with room on the balance sheet for buybacks,” Mackay opined.
Quantifying his stance, the Goldman Sachs analyst goes on to rate MPLX shares as a Buy, and his price target of $40 implies ~14% upside in the next 12 months. Combine that with the dividend, and the return can approach 22%. (To watch Mackay’s track record, click here)
Overall, we’re looking at a stock with a Moderate Buy rating from the Street, a rating supported by 8 recent analyst reviews with a breakdown of 6 Buys, 1 Hold, and 1 Sell. Shares are currently trading for $35.13, and their average target price of $40.88 suggests a one-year gain of 16%. (See MPLX stock forecast)
Hess Midstream Partners, LP (HESM)
Next up is another oil and gas midstream company. Hess Midstream Partners, like MPLX above, got its start as a spin-off, splitting from Hess Oil and holding its IPO in 2017. As an independent operator, Hess Midstream inherited the parent company’s pipeline and midstream operations. Today, Hess Midstream owns and operates a solid network of oil and gas transport assets, with its main operational focus on the Williston Basin, one of the rich production areas in the Dakota-Montana border area and part of the larger Bakken formation that got North America’s fracking revolution started.
Hess Midstream focuses on transporting crude oil, natural gas, and various water and fluid products generated by the fracking industry. The company’s network of gathering, processing & storage, and terminal & export services fills a vital niche in one of North America’s richest oil and gas production basins and forms the base for the firm’s recent forecast-beating financial results.
In the company’s last quarterly report, for 2Q23, Hess Midstream reported a top line of $324 million, up ~3% from the $313.4 million reported in 2Q22. The company’s earnings, at 50 cents per share, were based on a net income of $25.1 million. Hess Midstream’s distributable cash flow, $202.6 million, was down slightly from the $206.2 million in the prior-year quarter – but was still sufficient, with the earnings, to cover the dividend payment.
This midstream company set its common share dividend at $0.6011 per common share, for an annualized payment of just over $2.40 per share. This payment, which last went out on August 14, yields 8.45%. Hess Midstream has been keeping up a reliable dividend payment, with frequent supplemental payments since 2017.
Checking in again with John Mackay, we find the Goldman analyst is sanguine about Hess Midstream’s ability to maintain performance from its Bakken footprint. He wrote, “We see HESM as best positioned in the Bakken among its smid-cap peers given its large exposure to, and favorable contracts with, its sponsor HES. Our GS E&P research team sees HES oil production growing faster relative to the Bakken overall, making HESM better exposed vs. peers facing softer overall Bakken growth, as HES continues to reiterate its 200 kboe/d target in 2025 and expects to hold this production going forward…”
These comments support Mackay’s Buy rating on HESM, while his $32 price target points toward a 12% upside potential – or more than 20%, when the dividend is added to it.
Zooming out to the macro view, we find that Hess Midstream has picked up 5 recent analyst reviews, and their split, 3 Buy and 2 Holds, gives the shares a Moderate Buy consensus rating. With an average price target of $34.40 and a trading price of $28.47, HESM stock has ~21% upside potential. (See HESM stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.