With all the volatility in energy, there is good reason to be skeptical about whether crude oil prices have yet hit bottom.
In fact, I think that it’s very likely that, in the next few months, we could continue to see pain for the energy sector as oil prices move even lower.
However, this shouldn’t be death knell for energy investors. The fact remains that a bunch of oil-related investments offer big dividends and long-term staying power that will outlast any of the near-term volatility we will see in crude.
I’m talking about MLPs — reliable, low-bet stocks that provide a steady source of income over the long haul for patient investors not looking to call an exact bottom in crude or day-trade the volatility.
MLPs trade like stocks but enjoy tax benefits, as they avoid the “double taxation” of dividends. That is, the first hit coming when a company pays taxes on profits and the second when you as a shareholder get paid. MLPs pass profits directly on to shareholders.
They also can be insulated from commodity prices depending on their role in the production process; storage and pipleline stocks are simply “toll-takers” as crude moves from upstream to downstream businesses and are less affected by day-to-day fluctuations in price.
It all adds up to a lot to like for patient investors looking for 5% dividends or better.
If this sounds appealing to you, here are five top MLP stocks to consider right now.
Enterprise Products Partners (EPD)
Enterprise Products Partners L.P. (EPD) is the big dog in the pipeline space, with a $65 billion market cap and about $50 billion in annual revenue, and is very stable with a beta just above 0.7. The stock is up modestly in the last 12 months, while many other oil stocks are in the red.
And on top of that, based on its last distribution of 37 cents per share, Enterprise Product Partners offers a yield of almost 4.4% at current pricing. Furthermore, that payment has increased slowly, but steadily, to the tune of 85% dividend growth in the past 10 years.
The company continues to grow via acquisitions, as evidenced by the recent merger with Oiltanking Partners worth about $4.6 billion. Efforts like that ensure Enterprise Products Partners will remain the dominant player.
And best of all, if you’re concerned about crude, you can take comfort in the “toll-taker” nature of EPD. Engaged mainly in transportation, Enterprise Products Partners simply takes a cut as its clients move their energy downstream using its infrastructure. That’s a stable business, and one that will thrive regardless of short-term fluctuations in crude oil.
Shell Midstream Partners (RDS.A)
Shell Midstream Partners LP (SHLX) is a recent spinoff from well-known Big Oil player Royal Dutch Shell (RDS.A, RDS.B). Making its debut just last October, SHLX has wasted no time soaring 22% despite entering the market amid a deep downturn for crude oil.
The Shell MLP differs from its namesake oil major through the fact that it is simply a midstream transportation play — owning and operating the largest pipeline and gathering networks in North America, but without the exposure to production difficulties or bringing crude oil and gas to market downstream.
The MLP still has strong ties to its parent company, of course; SHLX owns a pipelines linking Royal Dutch Shell’s refineries to storage and sales facilities. But it also has objectively attractive assets such as a big stake in the Colonial Pipeline, the only pipeline that moves oil east from Cushing, Okla., to the Atlantic coast where it is in high demand.
There are no distributions from this MLP as yet, and thus no dividend yield to calculate. But InvestorPlace contributor Aaron Levitt estimated about $100 million worth of cash for distributions in 2015, and the close ties SHLX has with Royal Dutch Shell hold big promise for future growth as well as stability.
If you want to get in on the ground floor of what could be a massive dividend growth play, take a look at SHLX.
Memorial Production Partners (MEMP)
If you want a little more aggressive play in pursuit of a bigger dividend, take a look at Memorial Production Partners LP (MEMP).
As Aaron Levitt recently noted in his article about midstream MLPs to buy on a dip, Memorial “has been taken to the woodshed lately as investors have been fearing a huge distribution cut.” But much of the pain has been priced in, with MEMP stock down about 30% in the last year … and with a nosebleed yield of 15%, even cutting the dividend by two thirds in the dividend would still result in a generous 5% payout for investors.
And keep in mind that Memorial Production Partners has already snapped back more than 20% from its mid-December lows, so there are indications the worst is over.
As Levitt pointed out, rising production at MEMP should help offset some of the pain that weak pricing is causing for this oil and natural gas production play. Furthermore, a reasonably low debt load will give MEMP the flexibility to get through any rough patches, with roughly $1 billion in liquidity right now.
It’s an aggressive play, to be sure, but keep in mind that low oil prices won’t last forever and a lot of the negativity has already been priced in to stocks like Memorial Production Partners. Why not get paid to wait, then, with a juicy dividend that would still be triple or even quadruple the 10-year T-note if it took a big hit?
Plains All American Pipeline (PAA)
Plains All American Pipeline, L.P. (PAA) is involved in both transportation and storage of crude oil and natural gas, and it operates at a substantial scale. The company is valued at about $19 billion and generates about $45 billion in revenue annually from its midstream businesses.
It also boasts a juicy 5.2% dividend yield.
The reason I like Plains All American stock is because of its specific footprint serving some of the fastest-growing fracking markets in the nation: the Barnett, Eagle Ford, Marcellus and Utica shale fields, among others.
While many energy experts expect the high volume of shale gas to work against natural-gas pricing in the next year or so, that volume of production also means a high volume of business for Plains All American.
Beyond its current dividend, it’s also worth noting PAA payouts have more than doubled from about 31 cents in 2005 to 66 cents currently. It’s reasonable to expect more of the same from this big dividend machine going forward.
Energy Transfer Partners (ETP)
Going back to my favorite subsector of pipelines, investors should consider Energy Transfer Partners LP (ETP) and its 6.1% dividend if they are looking for big income amid weak oil prices.
ETP operates about 35,000 miles of natural-gas pipelines, and after an April agreement to acquire Susser Holdings for $1.8 billion, the company is even more focused on this core midstream mission of transporting oil and natural gas.
On the surface, investors may think buying Susser would seem like a step in the wrong direction. After all, Susser operates hundreds of convenience stores mainly in Texas, Oklahoma and New Mexico. But the fact is that Energy Transfer Partners already was stuck with a large stake in Sunoco retail operations after a series of moves in 2012, so the purchase of Susser actually provides ETP an opportunity to squeeze more value out of its retail gas station business … and then, hopefully, divest itself of those operations to interested buyers.
This is a bit confusing to some investors, but keep in mind that management had been positioning itself to sell the Sunoco retail business before the Susser acquisition.
Besides, Energy Transfer Partners investors can afford to wait. Unlike other energy players, ETP is actually up 17% in the last 12 months — and with a 6.1% dividend yield based on current prices, the income alone is reason to have confidence in this MLP going forward.