A High-Yield Stock On A Path To Double

For long-term investment success, it’s hard to find a better strategy than investing in the stocks of companies that grow their dividends. The math for success is compelling and, for many investors, surprising. And there is one market sector with especially compelling yield plus dividend growth potential.

Let’s look at the hypothetical math. Let’s say a stock has a 5% dividend yield and grows its dividend rate by 5% a year. When the dividend increases, for the yield to stay at 5%, the share price must appreciate by 5%. The result is the dividend of 5% plus a share price gain of 5%, for a total annual return of 10%.

The math works in the real stock market. The effects of dividend growth get lost in the short-to-intermediate swings of the market. However, when you look at the long-term results (five to 10 years) for dividend growth stocks, you will get an annual compound total return that is very close to the average yield for the period, plus the average annual dividend growth rate.

This brings us to master limited partnerships (MLPs). These are energy midstream infrastructure owners’ and operators’ structured and limited partnerships. Investors own LP units.

VettaFi manages the Alerian midstream indexes: the Alerian Midstream Energy Index (AMNA), the Alerian MLP Index (AMZ), and the Alerian MLP Infrastructure Index (AMZI). MLPs make up the majority to 100% of the index components. VettaFi recently published this table showing the number and percentage of the index components that have raised dividends year-over-year as of the second quarter:

Depending on the index, dividends of midstream companies increased by 80%, to almost 100% by market cap weighting, over the last year.

Along with the dividend growth, yields in the sector are very attractive. The article notes that AMZI carries an average yield of 7.5%, AMZ yields 7.2%, and AMNA sports a 5.6% yield. AMNA includes corporate midstream companies, which typically have lower yields.

Through the InfraCap MLP ETF (AMZA), you can get comprehensive investment exposure (with no K-1 reporting) to MLPs. The ETF yields 7.8% and grows the monthly dividend by about 8% per year.

I have a subscriber who likes to ask if an investment in AMZA could double in five years. The dividend growth math gives 15% compounding annual total returns. The rule of 72 indicates that a double in five years is possible.

This post originally appeared at Investors Alley.

Category: Dividend Stocks