While I’m an income investor at heart, I also like a good growth story. However, I’ve found that the best returns come from companies that can deliver both growth and income. Since 1973, dividend initiators and growers have produced a 10.7% average annualized total return (dividend income plus stock price appreciation), outpacing stocks with no change in dividend policy (7.1%) and non-payers (4.8%), according to data by Ned Davis Research and Hartford Funds. Because of that, I’ve steadily shifted my portfolio’s focus toward dividend growth stocks.
Two companies that allow investors to have their proverbial cake and eat it too are Cheniere Energy (LNG -1.45%) and Magellan Midstream Partners (MMP -1.08%). Here’s a closer look at these two dividend growth stocks.
Just getting started in growing its dividend
Cheniere Energy is a leading producer and exporter of liquefied natural gas (LNG). It currently operates two liquefaction facilities, Sabine Pass and Corpus Christi, that can produce 45 million tons of LNG annually. It sells the bulk of this LNG under long-term contracts, enabling it to generate reasonably predictable cash flow. That gives Cheniere the money to repay debt, fund its continued expansion, repurchase shares, and pay dividends.
Cheniere Energy initiated its quarterly dividend late last year at $0.33 per share each quarter. At the current stock price, it offers a dividend yield of 0.8%. That’s below the S&P 500‘s 1.5% dividend yield. Because of that, Cheniere isn’t appealing to income-focused investors since many desire a higher yield.
That’s causing them to miss out on Cheniere’s growth prospects and greater total return potential. The company recently completed the sixth liquefaction train at Sabine Pass. It also made a positive final investment decision on its Corpus Christi Stage 3 Liquefaction project that will add more than 10 million tons of LNG capacity per year when it comes online in 2026.
Along with the impact of share repurchases and debt reduction, these expanded facilities position Cheniere to grow its distributable cash flow run rate up to $15-$17 per share in the coming years. That’s a considerable increase from the $2.02 per share it delivered last year. That growing cash flow will give Cheniere the fuel to increase its dividend at a low-single-digit annual rate for the next several years. That sets it up to potentially produce even higher total returns as cash flow grows faster.
A big-time income stream with an overlooked growth track record
Magellan Midstream Partners is a master limited partnership (MLP) focused on operating crude oil and refined products pipelines and related storage terminals. These assets also generate stable cash flow backed by long-term contracts. That provides Magellan with the funds to pay a big-time cash distribution that currently yields 7.9%.
However, growth investors shouldn’t overlook this income-focused investment. Magellan has a long history of expanding its operations, cash flow, and distributions. The MLP recently approved expanding its refined products pipeline system to El Paso. It will invest $125 million into the project, which it expects to complete in early 2024. That will supply it with incremental cash flow that it can use to grow its payout, repurchase units, or fund additional high-return expansions.
Magellan has an excellent track record of investing capital to earn high returns for investors. It has historically delivered an average return on invested capital of over 15%. That enables its investments to move the needle farther than if it spent money on lower-returning projects. The MLP’s return focus has helped it steadily grow its cash flow and big-time payout. Magellan has increased its payout for more than 20 straight years, which it sees continuing for the foreseeable future. That growing income stream could help fuel attractive total returns for investors in the future.
Dual return drivers
Companies focused on one shareholder pursuit have historically underperformed those that can deliver growth and income. Because of that, investors seeking the highest returns should fill their portfolio with stocks that can provide a steadily rising income stream. That’s exactly what Magellan Midstream has done over the years, while Cheniere appears poised to follow in its footsteps. With Magellan offering a bit more income and Cheniere a higher growth rate, they’re a good complement for investors seeking a balance between those two return drivers.