Investing in stocks with strong dividend growth has historically proven to be a powerful total return strategy. Mathematically, for a stock to stay at a certain yield, the share price must increase at a rate that equals the annual dividend growth rate. Long term results show that dividend growth stocks produce average annual returns that end up very close to the average dividend growth rate plus the average dividend yield.
Energy infrastructure stocks have a long-term record of attractive current yields and steady dividend growth. These are the companies that own pipelines, storage facilities, and loading/unloading terminals.
The energy commodity crash of 2015-2016 forced a lot of companies providing infrastructure services to restructure their growth plans and strengthen the balance sheets. A further drag on the energy infrastructure sector was that many of the companies in the group were organized as master limited partnerships (MLPs).
Over the last three years, MLPs have gotten a bad rap from investors. Few investors want to jump into a sector where values are falling and there are additional tax reporting requirements.
While many energy midstream (another term for the infrastructure sector) companies chose to cut or stop growing dividend rates, a handful of quality businesses have continued or restarted dividend growth. However, the market has not rewarded stocks with growing dividends with higher share prices to match the dividend increases.