The best income stocks offer big dividends, decent share appreciation and rock-solid stability. And one of the best places to look for that triple-threat of a dividend stock is in the master limited partnership arena.
Master limited partnerships, or MLPs, are quirky investments. They have special tax rules, offering “distributions” instead of dividends to its “partners” or “unitholders.” But don’t let the jargon fool you. MLPs essentially are the same as dividend stocks, only their special corporate structure ensures that the vast majority of any profits are delivered right back to shareholders. Er, I mean “unitholders.” You get the idea.
Anyway, most MLPs exist in the energy arena, since the special partnership structure is designed for tax benefits in this capital-intensive but economically crucial sector. The thought is that the IRS can afford to cut these guys a break — so long as they return the lion’s share of profits to shareholders — since we need pipelines and other energy infrastructure.
It’s a win-win — companies get a favorable tax structure and investors get big-time payouts in businesses that have almost no competition and very robust baseline demand.
So what are the top MLPs out there? Here are three to consider.
Cheniere Energy Partners LP
Cheniere Energy Partners LP (AMEX:CQP) is a great example of the difference between conventional energy stocks that might be suffering and related MLPs that are thriving. In the past 12 months, parent company Cheniere Energy Inc. (AMEX:LNG) — a conventional for-profit energy stock — is down about 80% and has been bleeding cash since before 2008 thanks to the crash in natural gas prices.
However, while Cheniere Energy Inc. is painfully unprofitable, the partnership with the same name is thriving — up more than 17% in the last year, with a current yield of 6%.
Why? Well, primarily because CQP is not affected by natural gas prices. It gets paid simply by volume as it passes natural gas through its Sabine Pass hub just east of Houston. It is one of a precious few deepwater ports along the Gulf Coast suitable for importing and exporting liquefied natural gas.
Considering the massive domestic supply of natural gas and the fact that the fuel burns cleaner than coal or oil, this has big long-term potential. A boost in energy exports would be a boon to CQP — and to distributions of this MLP.
If you like this pick, just be careful to use the correct symbol — CQP for the partnership.
Enterprise Products Partners LP
Enterprise Products Partners LP (NYSE:EPD) is literally the dividend stock that keeps on giving. Enterprise has a track record of 35 straight quarter-over-quarter increases to its distributions. You’ll have to go all the way back to 2004 to find a dividend that didn’t move up!
The increases are modest, but powerful over time. Distributions have increased 34% since the beginning of 2008 and 94% since 2003. This is the kind of info that long-term income investors salivate over.
The icing on the cake is the MLP story behind Enterprise Products. This natural gas and oil company is a leader in so-called “midstream” infrastructure in the deepwater of the Gulf of Mexico. The “upstream” part is the actual production of energy by drilling companies and oil service stocks. The “downstream” activity involves delivering natural gas to end-users. EPD is the middleman, taking a cut along the way.
As you can see, it’s a profitable business. And because transporting gas and oil like this is a capital-intensive business, there is no competition or risk of upstart competitors eating Enterprise’s lunch anytime soon.
Perhaps the most exciting part of Enterprise Products is its 1,230-mile Appalachia-to-Texas Express Pipeline project. The ATEX Express, as it’s called, will connect natural gas operations in and around the Marcellus/Utica Shale region of Pennsylvania and upstate New York to energy processing facilities (and customers!) in energy-hungry regions to the south. It’s a long way for gas to move, but considering the abundance and affordability of domestic natural gas — and not to mention the political will to wean America off foreign oil — the ATEX pipeline could be an impressive opportunity in the years ahead.
Plains All-American Pipeline LP
Plains All-American Pipeline LP (NYSE:PAA) makes its money via storage, terminalling and marketing of crude oil and other energy products. But the biggest competitive advantage to this company is its partnership with top players in shale oil fields. From the Permian Basin to the Bakken Shale to Eagle Ford and Mississippian Lime, Plains is connected to them all.
Of course, while Plains All-American does not produce oil and is not exposed directly to commodity prices, it’s worth noting that the more costly nature of shale oil (as opposed to more easily extracted oil from conventional wells) can severely limit production from these regions. If oil prices are too low — below $80 or so — producers are basically breaking even on their output, so there’s no incentive to pump like crazy. Thus less fuel flows through PAA distribution facilities, resulting in lower revenue.
However, that risk hasn’t been a factor as of late as crude prices have remained firm. Consider that PAA is up 45% in the last 12 months on share price alone!
And on the income side of things, Plains has raised distributions 15 quarters in a row (accounting for a recent split) and hasn’t seen a quarter-over-quarter reduction in over 12 years, dating back to early 2000.
If crude oil demand increases and if prices firm up, boosting shale oil production, the numbers could be even more impressive in the years to come.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.