For investors looking for strong dividend yields, master limited partnerships (MLPs) remain a powerful portfolio tool. After all, the corporate structure is designed to kick out large, tax-advantaged dividends to unit holders and the sponsoring general partners. Those high yields often average in the 4% to 7% range — handily beating the pants off of Treasury bonds.
Even better, MLP distributions typically grow faster than rates of inflation — meaning they are a perfect way to play rising interest rate environments. Exactly the kind of environment we’re about to enter.
And given those strong, stable and growing dividends, it’s no wonder why more and more MLPs are finding their ways into investor portfolios.
But as they’ve become more popular, so has the sheer number of MLPs on the market. So how does an investor choose? Luckily, here at InvestorPlace we’ve done some of the legwork. Here are four MLPs that have a distribution yield of 4% or more.
MLPs Yielding 4%+ #1: NuStar Energy
Distribution yield: 7.5%
For investors in midstream player NuStar Energy L.P. (NS), it’s been a long and difficult road. After separating from refiner Valero (VLO) back in 2007, NS has been losing money. Various goodwill impairment charges at its asphalt refining facilities and crude oil storage terminals has made things difficult at the MLP — flat-lining its distribution growth and hurting its share price.
However, things are finally starting to turn around.
NuStar has undergone a series of moves to strengthen its asset base and reduce debt. That process has included moving crude oil and natural gas in the Eagle Ford as well as reducing its exposure to margin-based business like asphalt refining.
These efforts have already begun to bear fruit. NS reported better-than-expected second-quarter earnings due to improved performance at these fee-based businesses. Cash flows at the MLP were robust enough that NuStar was able completely cover its quarterly dividend distribution — without dipping into its cash reserves — for the first time since 2011. That’s a huge deal for the struggling firm and could mean that dividend growth could finally be coming NuStar’s way sooner than later.
Meanwhile, investors are treated to a hefty 7.5% dividend while they wait.
MLPs Yielding 4%+ #2: TC PipeLines
Distribution yield: 6.6%
TCP owns in six interstate natural gas pipelines that transport approximately 8.9 billion cubic feet of natural gas per day. The key is that these are federally regulated assets, meaning TCP pretty much knows what it’s going to earn from these midstream facilities and prevents earnings and cash flow “hiccups.” Stability is the name of the game here.
And that boring nature has afforded TCP the ability to quietly grow earnings and distributions over the years as it wins rate hikes. In fact, TCP has grown its distribution by more than 77% since its inception in 1999. The latest hike — 3.7%- came with its most recent profitable quarterly earnings. TCP now yields a juicy 6.6%.
And with TransCanada finally beginning to get serious about “dropping down” more assets in TCP, that dividend could grow even further down the road, making the MLP a prime income pick for investors.
MLPs Yielding 4%+ #3: MarkWest Energy Partners
Distribution yield: 5.1%
One of the most lucrative shale formations in the United States is the Marcellus shale of Pennsylvania. However, the region seriously lacks infrastructure, which creates a great opportunity for MLP MarkWest Energy (MWE). MarkWest is leading the infrastructure charge and buildout.
MWE currently has 12 major midstream projects under construction in the Marcellus and neighboring Utica shales. Five of these projects will be completed and be operational by the end of the year. The projects will make MWE the dominate player in the region when it comes to moving and processing natural gas and natural gas liquids (NGLs). More importantly, they’ll drive earnings higher and higher into the future.
Not that MWE really needs help on that front.
Its other, older assets in Texas, Oklahoma and the Gulf continue to drive cash flows upward. As a result, the MLP recently upped its dividend by 4.8% and now shares of MarkWest yield a hefty 5.1%.
Basically, MWE is both a growth story and an income play for investors.
MLPs Yielding 4%+ #4: DCP Midstream Partners
Distribution yield: 5.3%
For MLP investors, what separates the winners from the losers really comes down to distribution growth. DCP Midstream Partners (DPM) just declared its 15th consecutive quarterly dividend increase. That’s a pretty impressive track record for a relatively new MLP.
That dividend growth has largely been driven by DPM’s vast array of midstream assets, which have grown nearly three-fold since its launch in 2010. The firm owns everything from natural gas pipelines and storage to NGLs and propane facilities. What investors get is a balanced mix of businesses that help diversify each other.
And like the other MLPs on this list, DPM is working hard to expand its midstream assets.
DPM has two projects under construction that will begin commercial operations before 2015. Additionally, the firm has identified at least $5 billion worth of potential drop-downs from its non-publicly traded parent DCP. All of these will used to boost cash flows and ultimately distribution growth even further.
It may not be a household name, but DPM and its growing 5.3% yield should be on every investors MLP list.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.