Prediction: This Pipeline Stock's Payout Will Grow Faster Than Chevron's [or Exxon's] Over the Next 5 Years

For committed, patient long-term income investors, some of the best opportunities, in terms of both yield and payout growth, can be found in the energy patch.

The sector's status as a payout haven encompasses a broad range of names, from pipeline stocks to some of the world's largest oil companies. Many market participants opt for familiarity and reliability, which helps explain why ExxonMobil and Chevron are hits with dividend investors. The two largest U.S. domestic oil companies have dividend increase streaks of 43 and 39 years, respectively.

Sunoco LP is an overlooked midstream name with big dividend growth potential. Image source: Getty Images.

To be sure, those are impressive runs, but barring any surprises, those companies are likely to continue raising their payouts at low-single-digit percentages. Income-hungry investors seeking rapid dividend growth should look to the midstream segment, home to Sunoco LP (NYSE: SUN). Indeed, this pipeline company has sunny dividend potential.

This SUN can shine for dividend investors

First, a housekeeping item. Sunoco LP is not the same as SunocoCorp LLC (NYSE: SUNC). However, the latter "owns a direct limited partner interest in Sunoco LP." Interestingly, Sunoco LP's general partner is owned by Energy Transfer, one of the most beloved large-cap names in the midstream income space.

Maybe it's a stretch, but DNA is relevant because Sunoco LP is following the Energy Transfer playbook, becoming a serial dividend grower and quarterly at that. Sunoco LP's most recent dividend increase of 1.25% marked the seventh straight quarter in which the pipeline operator hiked the payout.

That keeps it on pace to meet its stated objective of a "multi-year distribution growth rate of at least 5%." So if that rate is met or exceeded, I'm not going out on a limb by saying that Sunoco LP's dividend should grow at a higher percentage over the next five years than the payouts of ExxonMobil and Chevron.

Sunoco LP currently yields 5.3%, which is above the yields typically seen in integrated oil equities. However, that yield isn't a cause for alarm. The midstream company's net leverage ratio of 3.98x is where executives want it to be, and the operator is considered a disciplined capital allocator, implying a commitment to debt management and dividend growth.

This dividend could surprise

All right, so it's clear that Sunoco LP is targeting distribution growth of at least 5% annually, which is likely to surpass what ExxonMobil and Chevron deliver. However, Sunoco (though it's not guaranteed) may exceed its stated payout growth rate.

Earlier this month, Sunoco LP announced the $600 million all-cash acquisition of Offen Petroleum. No, a $600 million deal isn't earth-shattering news, particularly in the energy sector, but the details matter. The acquisition isn't financially straining Sunoco LP. Still, it did tell investors that the purchase will be accretive right off the bat, while clearly stating that the deal "will increase cash flow for distribution growth."

So it's possible that as Offen is brought into the Sunoco LP fold (the transaction closes in the fourth quarter), the acquisition could pave the way for dividend growth north of 5% starting next year. Even if that doesn't happen, dependable 5% raises are pretty good, too.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.