1 Energy Stock Offering a Massive Annual Dividend. Is It the Perfect Buy for Passive Income Investors?

Key Points

• MPLX generates more than enough stable cash flow to cover its big-time payout.

• It has very conservative financial metrics.

• The MLP has a very healthy growth profile.

• 10 stocks we like better than MPLX ›

The energy sector is an attractive spot for income investors these days. It offers the S&P 500's (SNPINDEX: ^GSPC) highest average dividend yield at about 3.4% -- nearly triple the index's average of less than 1.2%.

Many energy stocks offer even higher dividend yields, appealing to investors seeking passive income. MPLX (NYSE: MPLX) stands out for its massive 7.5% yield, making it a potentially perfect pick for those focused on generating income.

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A high-quality, high-yielding payout

High-yielding dividend stocks often raise concerns for investors, as many carry higher risk profiles or slower growth rates. However, MPLX isn't your typical high-yield stock.

The master limited partnership (MLP) has a very low risk profile. The diversified midstream company generates lots of stable cash flow, backed by long-term contracts and government-regulated rate structures.

Through the first six months of this year, MPLX produced nearly $2.9 billion in distributable cash flow. That covered its high-yielding payout by a comfortable 1.5 times, enabling the MLP to produce nearly $1 billion in excess free cash flow. It returned an additional $200 million to investors via unit repurchases and retained the rest to fund expansion projects and maintain its financial flexibility.

MPLX has one of the strongest balance sheets in the midstream sector. It ended the second quarter with a 3.1 times leverage ratio. That's down from 3.4x in the same period of last year and well below the 4.0x range its stable cash flows can support.

For investors seeking income, the MLP stands out for its comfortable coverage ratio and strong balance sheet, which help provide confidence in the sustainability of its high-yielding distribution.

Ample fuel to continue growing

MPLX also stands out for its strong growth profile. The MLP currently has an abundance of expansion projects in the backlog, including:

• Gas processing plants: It's building the Secretariat and Harmon Creek III gas processing plants. They have in-service dates of the end of 2025 and the second half of 2026, respectively.
• Natural gas pipelines: MPLX's WPC joint venture (JV) is building the Rio Bravo, Blackcomb, and Traverse pipelines. Additionally, its Matterhorn JV recently sanctioned the Eiger Express Pipeline. These long-haul natural gas pipelines will start entering commercial service in the second half of next year (Rio Bravo and Blackcomb) through mid-2028 (Eiger).
• NGL Infrastructure: The company is expanding its BANGL Pipeline, building two Gulf Coast NGL fractionators, and constructing an LPG export terminal with an associated pipeline with a JV partner. These projects should enter service starting in the second half of next year, with the final project scheduled for 2029.

This long list of expansion projects supports MPLX's strategy of delivering mid-single-digit annual earnings growth. For income-oriented investors, that is a healthy growth rate for a high-yielding dividend stock.

Additionally, MLPX is using its strong financial profile to make acquisitions that boost its cash flow and enhance its growth profile. So far this year, it has bought the remaining interest in BANGL, purchased an additional stake in Matterhorn, and acquired Northwind Midstream and Whiptail Midstream. The Northwind deal is the largest, at $2.4 billion.

These acquisitions will immediately provide the MLP with incremental income. Most of them also came with embedded expansion opportunities that will provide additional earnings growth over the next couple of years.

The growth from organic expansion projects and acquisitions should give MPLX the fuel to continue increasing its high-yielding distribution. The MLP has raised its payout every year since its formation in 2012, while growing it at a 10.7% compound annual rate since 2021. Given its healthy coverage and leverage ratios, MPLX should be able to grow its distribution at a mid-to-high single-digit rate over the coming years.

A pretty perfect passive income investment

MPLX is an ideal stock for passive income seekers. It offers a high-yield payout supported by a solid financial foundation. The MLP also has a strong growth profile. These factors make it a potentially perfect choice for investors who are comfortable receiving a Schedule K-1 federal tax form each year, which reports the investor's share of partnership income for tax filing. Although this can add complexity at tax time, it may also provide certain tax benefits for investors.

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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.