Income investors looking for high yields should consider Master Limited Partnerships, otherwise known as MLPs. These stocks have certain tax implications and unique structures that investors should carefully weigh before buying.
With that said, the major advantage of MLPs is they widely offer much higher yields than the average stock. For example, many MLPs offer high yields of 5% or more. In rare cases, MLPs have double-digit yields of more than 10%. At the same time, the S&P 500 Index yields just ~2% on average right now.
As a result, income investors such as retirees that are interested in growing their investment income should consider MLPs for inclusion within their stock portfolios. The following 3 MLPs have high yields, and importantly, sustainable distributions with the potential for increased distributions down the road.
Top MLP No. 3: Magellan Midstream Partners MMP
- Current Yield: 6.3%
Magellan Midstream Partners has the longest pipeline system of refined products in the U.S., with 9,700 miles of pipeline, 53 terminals and 45 million barrels of storage capacity. The company's refined products network is linked to nearly half of the total U.S. refining capacity. This segment generates 59% of its total operating income while the transportation and storage of crude oil generates 34% of its operating income. Magellan Midstream has a market capitalization of $14.6 billion.
In early August, Magellan Midstream reported strong second-quarter results. Distributable cash flow increased 18% to $315 million, thanks to higher tariffs in the core refined product pipelines segment. Management also raised its annual DCF guidance for a second time this year, from $1.18 billion to $1.22 billion, and thus it now expects a distribution coverage ratio around 1.30x.
Magellan Midstream will invest $1.1 billion in growth projects this year and $150 million in 2020, which will provide for future growth. It also has above $500 million of potential growth projects under consideration. This growth will allow for continued distribution increases in the years ahead. The company expects to raise its distribution by about 5% this year and maintain a distribution coverage ratio of at least 1.20x for the foreseeable future.
Magellan Midstream is a conservatively-run MLP, which has provided investors with steady distribution increases during the company's existence. On July 25, Magellan Midstream increased its distribution by 6% compared with the same quarterly payout last year, amounting to its 69th distribution hike since its initial public offering in 2001. Since that time, the company has increased its distribution by 12% compounded annually.
Magellan Midstream also has a lean balance sheet, with a high credit rating of BBB+ from Standard & Poor's and a modest leverage ratio of 2.8x.
Top MLP No. 2: Energy Transfer LP ET
- Current Yield: 9.6%
Energy Transfer is a midstream MLP in a period of transition. Last year, the company announced the merger of Energy Transfer Equity, LP (previously ETE) and Energy Transfer Partners, LP (previously ETP). As part of the merger, ETE changed its name to "Energy Transfer LP" and the common units began trading under the "ET" symbol.
The combined firm owns and operates one of the largest and most diversified portfolios of energy assets in the United States. Operations include natural gas transportation and storage along with crude oil, natural gas liquids and refined product transportation and storage totaling 83,000 miles of pipelines. Energy Transfer, a $35 billion market capitalization company, also owns the Lake Charles LNG Company, as well as stakes in publicly-traded Sunoco LP (SUN) and USA Compression Partners (USAC).
On August 8, Energy Transfer reported second-quarter results. Adjusted EBITDA increased 25% year-over-year, and reached a record $2.82 billion for the quarter, while distributable cash flow increased 23% to $1.6 billion. Energy Transfer saw growth in four of its five core businesses, with record operating performance in its natural gas liquids and refined products segments. Because of its strong growth, the company recorded a strong distribution coverage ratio of 2.0x.
Energy Transfer expects to spend $4.6 billion to $4.8 billion on capital expenditures this year, which will help grow future cash flow. The company is making progress across multiple key projects. Last quarter, it announced its eighth natural gas liquids (NGL) fractionation facility at Mont Belvieu, Texas, a 150,000 barrel per day fractionator that is scheduled to be in service in the second quarter of 2021. The company is also working on the expansion of the Permian Express 4, which will add 120,000 barrels per day of capacity by the end of the third quarter.
Because of its nearly 10% yield and quality assets, we view Energy Transfer as one of the top high-dividend stocks to buy right now.
Top MLP No. 1: Enterprise Products Partners EPD
- Current Yield: 6.4%
Enterprise Products Partners has a tremendous asset base which consists of nearly 50,000 miles of natural gas, natural gas liquids, crude oil, and refined products pipelines. It also has storage capacity of more than 250 million barrels. These assets collect fees based on materials transported and stored.
On July 31, Enterprise Products reported second-quarter 2019 financial results. Profits nearly doubled year-over-year thanks to record volumes of crude oil and natural gas liquids. The partnership also posted a quarterly record for adjusted EBITDA, as it increased 18% to $2.1 billion. Distributable cash flow increased 21% for the quarter and reached a company record.
Enterprise Products registered a distribution coverage ratio of 1.8x last quarter, implying a sufficiently covered payout that has room for growth. A high coverage ratio also provides for investment in new growth projects. Enterprise Products has multiple new projects to fuel its future growth. For example, Enterprise Products has started construction of the Mentone cryogenic natural gas processing plant in Texas, which will have the capacity to process 300 million cubic feet per day of natural gas and extract more than 40,000 barrels per day of natural gas liquids. The facility is expected to begin service in the first quarter of 2020. Enterprise Products is also developing the Shin Oak NGL Pipeline, which is scheduled to be placed into service next year. The Shin Oak NGL Pipeline is expected to have total capacity of 600,000 barrels per day.
Enterprise Products Partners is one of the strongest midstream MLPs. It has credit ratings of BBB+ from Standard & Poor's and Baa1 from Moody's, which are higher ratings than most MLPs. Enterprise Products has increased its distribution to unitholders for 61 quarters in a row, a tremendous track record of steady distribution growth to go along with its attractive 6.3% yield. Because of its impressive history of distribution growth, we view Enterprise Products as a blue-chip stock.
Final Thoughts
Investors should carefully weigh the potential risks before buying MLPs, as well as the specific tax implications of investing in MLPs. Investors should pay particularly close attention to debt levels among MLPs, as this caused a deep downturn in 2014-2016 when commodity prices plunged.
That said, the three MLPs mentioned above have improved balance sheets which allowed them to maintain their distributions during the recent oil and gas industry downturn. They also have high-quality assets that generate strong cash flow, which should provide the room for future distribution increases. Along with their high yields, these qualities make them attractive picks for income investors.
This article is from one of our external contributors.
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