With interest rates still at near-zero levels and traditional income investments yielding next to nothing, investors’ fascination in master limited partnerships (MLPs) remains at an all-time high.
And what’s not to like? The corporate tax structure allows for sponsoring firms and investors to receive some pretty hefty tax-deferred distributions. And as a pass-through entity, these dividend-like payouts typically result in high yields ranging anywhere from 4% to 7%.
Not too shabby.
While much has been written about how high-yielding investments can suffer during periods of rising rates, the truth is that most MLPs will be just fine. That’s because many master limited partnerships that own pipelines, storage facilities and other midstream infrastructure fees are indexed to measures of inflation. That steadily rising fee income usually translates into aggressive distribution growth, and subsequently, high yield.
In short: MLPs historically have been able to provide yield growth in excess of rising rates.
Of course, not every MLP is worthy of your investment dollar. Which is why today, we’ll look at six master limited partnerships that still have the goods.
MLPs With High Yield: Enterprise Products Partners L.P. (EPD)
Distribution Yield: 4%
With nearly 51,000 miles worth of pipelines, 225 million barrels of storage capacity for crude oil and other refined products, and 14 billion cubic feet of natural gas storage, Enterprise Products Partners L.P. (NYSE:EPD) is one of the largest MLPs around.
EPD’s scale and exposure to multiple energy commodities has padded Enterprise’s (and investors’) bottom line for years. Enterprise’s last dividend increase was a 5.6% bump to 37.5 cents per unit, marking EPD’s 43rd consecutive quarterly increase and its 52nd increase since coming public back in 1998.
Currently, EPD yields a healthy 4%, but there’s plenty of potential for both higher yield on cost and plain ol’ capital gains in the future.
EPD continues to add midstream assets in North America’s most prolific and lowest-production-cost regions, such as the Bakken, Eagle Ford and Marcellus shales. The oil will continue to flow in these regions for quite some time — and despite the recent crash in crude.
Additionally, Enterprise is one of just three companies that are allowed to export crude oil, and it also has expanded into liquefied petroleum gas (LPG).
Tack on EPD’s ample liquidity and potential for acquisitions, and there’s a lot to love about this MLP.
MLPs With High Yield: Holly Energy Partners, L.P. (HEP)
Distribution Yield: 6.3%
With oil prices cratering, we’ve returned to the halcyon days for refiners. They feed off lower feed stocks, realize higher margins and enjoy better earnings.
Also benefiting are the firms that feed all these refineries and facilities that process crude, such as master limited partnerships like Holly Energy Partners, L.P. (NYSE:HEP).
Spun off from refiner HollyFrontier Corp (NYSE:HFC) in 2004, HEP features a growing asset base that “feeds” HFC’s various facilities, stores refined products and moves that gasoline, jet fuel and other products from its operations.
That drop-down relationship between the two has aligned their interests together into a money-making machine. As HFC expands refining capacity, HEP expands its pipeline throughput. Likewise, expansion allows HollyFrontier to sell the MLP assets that are instantly accretive to its bottom line.
It’s a win-win.
How this filters down to investors? A high yield of 6%-plus that has been growing steadily for years.
MLPs With High Yield: Plains All American Pipeline, L.P. (PAA)
Distribution Yield: 5.4%
If you read a lot about energy supplies, you’ve probably come across a mention or two of the Cushing storage depot.
Well, master limited partnership Plains All American Pipeline, L.P. (NYSE:PAA) has one of the largest collections of storage tanks and pipelines in the area — around 20 million barrels worth. But it’s not just owning assets in the “pipeline capital of the world” that makes PAA a buy.
Plains has a huge diverse asset base — one of the largest, in fact. PAA moves around 4.1 million barrels of crude oil and NGL daily on its pipelines. But it’s not just crude oil and natural gas — Plains’ assets covers a mired of energy commodities and logistics operations. That includes owning tanker cars and barges. That wide range of operations has helped PAA weather the storms pretty nicely since going public back in 1998. Diversification has been key.
It also has made Plains one heck of dividend champion.
Including its most recent distribution increase (8.7%), PAA has improved its payout for 23 consecutive quarters, and in 42 of the past 44 quarters. Those are pretty impressive numbers, but numbers that should keep growing from here.
MLPs With High Yield: SunCoke Energy Partners LP (SXCP)
Distribution Yield: 10.3%
Coal is in the doghouse right now.
Numerous coal miners have been taken to the woodshed as various forces work against the energy source.
On one hand, they are logistics firms that operate various terminals, barges and railway lines that move and store coal. On the other, SXCP is the continent’s largest independent producer of coke — what you get after you heat coal and prep it for the steelmaking process.
Those two sides make SXCP an interesting play on the painful coal sector.
Exports have become more important than ever for the coal miners. So SXCP and SXC make money moving, storing and sending that coal overseas. At the same time, SXCP has been able to boost its margins and take advantage of a low-cost environment.
While SXCP has taken it on the chin, that has bumped up the yield for current buyers to more than 10%. And despite the pain, SunCoke Energy Partners LP is still raising its distribution, most recently from 54.08 cents to 57.15 cents.
MLPs With High Yield: TC Pipelines, LP (TCP)
Distribution Yield: 5.5%
That’s because TCP has nothing to do with oil sands or crude oil or any of the controversy that has come along for the ride.
Instead, this MLP’s main assets include six critical, FERC-regulated pipelines that move roughly 8% of America’s daily natural gas demand.
“Regulation” has meant some rock-steady cash flows at TCP. its inception in 1998 through today, TCP has grown its dividend by double digits over the past five years, and its payout is some 87% higher than its first regular dividend from 1999.
TRP has finally gotten serious about using the MLP structure (and thus, TCP) in a more positive way. The Canadian midstream firm has announced plans to drop down all most of its U.S.-based natural gas pipeline assets into TCP. TransCanada expects to move as much as $1 billion in assets per year into the MLP at rates that would be instantly accretive to TCP’s cash flows and dividends.
Investors buying TCP are locking in a boring, stable MLP with a real chance for growth. Not to mention a high yield of more than 5%.
MLPs With High Yield: Williams Partners L.P. (WPZ)
Distribution Yield: 6.5%
Master limited partnership Williams Partners L.P. (NYSE:WPZ) once was the was king of natural gas. WPZ’s major operating areas are a who’s who of the hottest shale fields — including the prolific Marcellus field in Pennsylvania and Ohio’s Utica shale.
All in all, the firm’s vast pipeline network moved a large percentage of all the natural gas produced in the United States.
Well, if WPZ was king before, it could be a god now that it has purchased Access Midstream Partners and folded itself into the other MLP superstar.
Access gave WPZ … well, access … to several other major natural gas shale formations as well as plenty of NGL processing capabilities. The two MLPs fit snugly together, and now, the pair move more than 30% of the nation’s natural gas.
And things will just keep getting better.
Parent firm Williams Companies (NYSE:WMB) continue to effectively look for acquisitions to drop down into the newly merged WPZ. Additional petrochemical facilities, NGL process and natural gas pipelines should help pad cash flows and boost WPZ’s high 6.5% yield in the future.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.