Summary The midstream sector is experiencing a surge in natural gas demand, driven by artificial intelligence (AI), data centers, and liquid natural gas (LNG) exports. This shift presents opportunities for investors to capitalize on the growth of these industries. We've identified five high-yield stocks that not only offer attractive dividend yields but also have strong tailwinds and solid upside potential.
Energy Transfer: A Hefty Yield with Solid Growth Prospects
Energy Transfer, a leading midstream operator, boasts an impressive 7.4% yield that's well covered by its distributable cash flow. The company generates significant revenue from fee-based contracts, many of which are take-or-pay agreements that ensure steady income regardless of volumes. Energy Transfer's extensive footprint in the Permian Basin positions it to benefit directly from growing power demand and LNG exports.
The company is investing heavily in growth projects, with a $5 billion capex budget for 2024, up from $3 billion in 2023. This increased spending will drive expansion into emerging markets, such as data center development, which is expected to be a significant driver of growth. Additionally, the long-stalled Lake Charles LNG project appears to be gaining momentum, providing another boost to Energy Transfer's prospects.
Enterprise Products Partners: A Steady and Conservative Approach
Enterprise Products Partners has a reputation for steady growth, having increased its payout for 26 consecutive years. The company's business model is anchored by one of the strongest balance sheets in the midstream sector, with a leverage ratio below 3 times. Approximately 85% of Enterprise's cash flow comes from fee-based contracts, many of which include take-or-pay terms and inflation escalators.
Enterprise is managed conservatively but also knows when to pursue expansion opportunities. The company has $7.6 billion in growth projects, with $6 billion set to come online this year. Its spending on these projects has increased, rising to as much as $4.5 billion in 2024 from $3.9 billion last year.
Western Midstream: A Rock-Solid Balance Sheet and Growing Distributions
Western Midstream Partners offers a substantial 9.4% yield and boasts an impressive balance sheet with a leverage ratio below 3 times. The company's cash flows are anchored by cost-of-service contracts and minimum volume commitments, ensuring consistent results even in turbulent markets.
Management is targeting mid-single-digit annual increases in distributions while investing in strategic expansion opportunities. One of the biggest growth drivers for Western Midstream is the Pathfinder produced-water system, which will clean up water generated as a by-product of drilling and could cost up to $450 million.
MPLX: A High-Yield Stock with Strong Distribution Growth
MPLX has delivered some of the strongest distribution growth in the midstream sector over the past few years, growing its payout by double digits for three consecutive years. Despite this impressive performance, its distribution remains well covered by cash flow, and its balance sheet is in excellent shape.
The company's growth is driven by its natural gas and NGL segment, which handles around 10% of U.S. production. As demand from LNG exports and AI accelerates, MPLX is doubling its expansion capex to $1.7 billion in 2025. Additionally, the company is taking full ownership of the BANGL pipeline and partnering with Oneok on an integrated NGL export infrastructure joint venture.
Kinder Morgan: A Solid Performer with a Strong Natural Gas Footprint
Kinder Morgan's 4.1% yield may be lower than its peers', but it boasts one of the largest natural gas footprints, with approximately 40% of U.S. natural gas flowing through its system. The company generates significant revenue from volumetric fee-based contracts and has a substantial backlog of expansion projects.
Its project pipeline surged to $8.8 billion last quarter, up from $3 billion just a year ago. Over 70% of this growth is tied to power demand, with much of the new buildout targeting AI-related data centers and LNG facilities. Kinder Morgan's balance sheet has been cleaned up in recent years, reducing its leverage multiple from 5.1 in 2017 to 4 in 2024.
Conclusion
The midstream sector is poised for growth as natural gas demand surges driven by AI, data centers, and LNG exports. These five high-yield stocks – Energy Transfer, Enterprise Products Partners, Western Midstream, MPLX, and Kinder Morgan – offer attractive dividend yields, solid tailwinds, and strong upside potential. Investors can capitalize on the growth of these industries while benefiting from consistent dividends and increasing cash flows.