These 2 High-Yield Stocks Are Adding More Fuel to Their Dividend Growth Engines

Matthew DiLallo, The Motley Fool

Energy giants Phillips 66 (NYSE: PSX) and Plains All American Pipelines (NYSE: PAA) are both attractive options for income-seeking investors. Each pays a well-above-average dividend -- Phillips 66 currently yields 4.2% while Plains All American's payout is at 6.2% -- that it supports with a strong financial profile. Further, both companies have increased their dividends sharply in the past year. Phillips 66 boosted its payout 12.5% while Plains All American gave its investors a monster 20% raise for 2019.

Those payouts will likely head even higher in the coming years, as both companies recently approved the construction of some new oil pipeline projects. That makes them even more compelling stocks for yield seekers to consider.

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Liberating oil from the Rockies

Refining giant Phillips 66 has invested in several oil pipeline projects over the past few years. That's part of the company's strategy to not only increase the flow of cheaper North American oil to its refineries but increase the percentage of its earnings that come from more stable midstream assets. This approach has enabled Phillips 66 to steadily grow its cash flow, which has helped fuel impressive dividend growth. Overall, the refining and midstream company has increased its payout nine times since its formation in 2012, growing it at a 25% compound annual rate over that timeframe.

Phillips 66 is continuing this strategy by partnering with privately held Bridger Pipeline to build the Liberty Pipeline. This project includes the construction of a new oil pipeline from the Rockies and Bakken production areas to the nation's largest oil storage hub in Cushing, Oklahoma. From there the oil can flow through other pipelines to refining and export markets along the Gulf Coast. The companies expect to finish the $1.6 billion pipeline as early as the first quarter of 2021.

In commenting on the project, Phillips 66's CEO Greg Garland stated:

The Liberty Pipeline presents us with a great opportunity to serve producers in the growing Bakken and Rockies production areas. The pipeline adds to our integrated infrastructure network that serves the key shale oil producing regions with connectivity to major Gulf Coast market centers. Our pipeline network has strategic alignment with our Central Corridor and Gulf Coast refineries, further enhancing value across our assets.

Not only is the pipeline an excellent strategic fit for Phillips 66, but it will generate steady cash flow once it starts service since customers will ship oil under long-term, fee-based contracts. That will provide the company with some incremental cash flow to support continued dividend growth.

Pipelines laid out for construction at sunset.

Image source: Getty Images.

An alternative route from the Permian to the Gulf Coast

Phillips 66 is also partnering with oil pipeline MLP Plains All American Pipeline on the Red Oak Pipeline. This $2.5 billion pipeline system will transport oil from the Permian Basin in West Texas as well as from Cushing to refining and export markets along the Texas Gulf Coast. The companies expect initial service on the Cushing to Gulf Coast segment to start up by the first quarter of 2021. That timing coincides with the anticipated in-service date of the Liberty Pipeline, meaning shippers on that pipeline could move oil to the Gulf Coast via Red Oak. 

The other aspect of this pipeline is that it will provide an alternative route for oil to move from the fast-growing Permian Basin to the Gulf Coast. That's because the Red Oak joint venture will lease capacity on Plains All American's Sunrise Pipeline system, which currently moves oil from the Permian to Wichita Falls. From there, oil can flow via Red Oak to the Gulf Coast instead of continuing up to Cushing.

This pipeline is one of several that Plains All American has under construction to move oil from the fast-growing Permian Basin. The company's Cactus II pipeline should start partial service by the third quarter of this year and begin full operations in next year's first quarter. Meanwhile, its Wink to Webster Project with ExxonMobil should start up in the first half of 2021. Given the heavy investment needed to build these pipelines, Plains All American expects to increase its distribution to investors by only 5% per year in the near term. However, the company could deliver big-time dividend growth after 2021 as it starts benefiting from the cash flows associated with all its new pipelines.

Great dividend growth stocks

Phillips 66 and Plains All American are taking advantage of America's oil boom to build more pipeline infrastructure. These investments will supply those companies with growing streams of steady cash flow when the pipelines start up in a couple of years. That will give both companies more fuel to continue increasing their already attractive dividends, which is all the more reason for income-seeking investors to consider buying one of these energy stocks.

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Matthew DiLallo owns shares of Phillips 66. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.