Published by Nick McCullum on June 20, 2017
Master limited partnerships (or MLPs, for short) are some of the best investment vehicles for generating passive income.
They are also one of the most misunderstood and under-appreciated types of securities on the market.
Why is this?
It is because the taxes that investors pay on MLP distributions are more complicated than the taxes paid on the dividends of traditional corporations. This does not mean that the taxes paid are higher.
In fact, MLPs are the most tax efficient vehicles for returning money to investors, largely because they avoid the double taxation (personal and corporate) of normal corporate dividends. MLPs are not taxed at the organization level.
The personal taxes paid on MLP distribution are structured differently as a result.
Typically, somewhere around 80% to 90% of MLP distributions are considered a ‘return of capital’ because of depreciation. You don’t pay taxes immediately on ‘return of capital’ distributions.
Instead, returns of capital reduce your cost basis in the MLP. You are not taxed until you sell the units or your cost basis falls below zero..
With all this in mind, MLPs are a very viable investment vehicle for retirees and other investors seeking to generate current portfolio income. Most MLPs have 5%+ dividend yields, making them a compelling investment for high income investors.
This article will list the 10 best MLPs for high income, listed in order of their rank according to The 8 Rules of Dividend Investing.
High Income MLP #10: Spectra Energy Partners (SEP)
Spectra Energy Partners is a Houston-based master limited partnership that operates more than 15,000 miles of transmission pipelines, approximately 170 billion cubic feet of natural gas storage, and approximately 5.6 million barrels of crude oil storage.
Until recently, Spectra Energy Partners was affiliated with Spectra Energy (SE), which owned the general partner of Spectra Energy Partners and also had a limited partner investment in the MLP.
Spectra Energy recently merged with Enbridge (ENB), a Canadian midstream energy company with a market capitalization of US$63 billion.
Because of this merger, Spectra Energy Partners is now a member of the Enbridge family of partnerships, which also includes Enbridge Income Fund Holdings (ENF) and Enbridge Energy Partners (EEP).
Source: Spectra Energy Partners First Quarter Earnings Presentation, slide 2
Spectra Energy Partners is somewhat of a fan favorite among its investor base because of its track record of outstanding total returns.
The partnership has increased its cash distribution for 38 consecutive quarters and has done so without compromising the safety of its dividend.
This security-level performance is driven by strong fundamental business execution.
Spectra owns high-quality assets with a primary concentration on natural gas pipelines, and is focused on exercising its ‘last mile’ competitive advantage – the advantage of owning midstream energy assets at or near the assets of associated energy exploration corporations.
Source: Spectra Energy Partners First Quarter Earnings Presentation, slide 37
Some investors were concerned about the future of Spectra Energy Partners after its general partner (Spectra Energy) merged with Enbridge.
More specifically, there were rumors that Spectra Energy Partners would be fully absorbed by Enbridge and the associated assets would operate under the Enbridge name.
Enbridge has completed its post-merger strategic review and this outcome was not determined to be in the best interests of SEP shareholders. For the time being, Spectra Energy Partners will continue to operate as an independent entity with its general partner being a wholly-owned subsidiary of Enbridge.
And, the partnership has a strong dividend outlook for the year ahead period. Distributable cash flow guidance implies a distribution coverage ratio of 1.05x-1.15x for fiscal 2017, meaning that Spectra’s distribution is well-covered and this is some room to continue its streak of consecutive dividend increases (although near-term increases will likely be small).
Source: Spectra Energy Partners First Quarter Earnings Presentation, slide 33
Spectra Energy Partners is a very appealing investment from an income perspective. It has a dividend yield more than three times as high as the average dividend yield in the S&P 500.
The partnership currently pays a dividend of $0.70125 which yields 6.7% on the company’s current stock price of $41.61.
The following diagram compares its current dividend yield to the MLP’s long-term average.
Spectra’s current dividend yield is 6.7% and its average dividend yield over the past decade is 5.4%.
Based on dividend yield alone, Spectra Energy Partners appears to be more than 20% undervalued. For more information on this MLP, you can read more Sure Dividend analysis at the following link:
High Income MLP #9: Holly Energy Partners (HEP)
Holly Energy Partners is a publicly-traded master limited partnership that operates a system of petroleum product and crude pipelines, storage tanks, distribution terminals, loading racks, and processing units.
The partnership’s assets are strategically positioned to be located at or near the assets of HollyFrontier Corporation (HFC). HollyFrontier owns the general partner of Holly Energy Partners (Holly Logistics Services LLC) and also has a 35% limited partnership interest.
The GP’s 35% LP interest is higher than normal for an MLP family. This is a shareholder-friendly arrangement that helps to align the interests of all parties involved.
Source: Holly Energy Partners December Investor Presentation, slide 6
The economics of Holly Energy Partners’ business are attractive from a variety of standpoints.
Notably, the partnership’s revenues are contractual in nature and 100% fee-based. This helps to isolate the financial performance of Holly Energy Partners from fluctuations in the prices of its underlying commodities.
Holly Energy Partners has no contracts up for renewal until 2018 and more than 80% of the partnership’s revenues are tied to long-term contracts with minimum commitment levels.
These factors lead to favorable business stability. Holly Energy Partners has increased its quarterly dividend for 48 consecutive quarters since its initial public offering in 2004 (shown below).
Source: Holly Energy Partners December Investor Presentation, slide 3
Holly Energy Partners’ commendable performance is driven at the business level.
The partnership owns a high-quality, diversified base of assets spread across many geographies in the United States. As mentioned, HEP’s assets are strategically located near HFC’s operations, allowing the MLP and its GP to collaborate on projects that benefit both corporate entities.
Below, a map is shown highlighting the assets of both Holly Energy Partners and HollyFrontier.
Source: Holly Energy Partners December Investor Presentation, slide 4
The collaboration between Holly Energy Partners and HollyFrontier extends beyond existing business operations.
Occasionally, the two entities will execute a ‘dropdown transaction’, where Holly Energy Partners will purchase assets from HollyFrontier. This frees up room on HollyFrontier’s balance sheet to acquire additional assets that compliment the operations of both entities.
Below, a summary of two recent dropdown transactions is shown. The two transactions had total cash considerations of $278 million and $62 million, respectively.
Source: Holly Energy Partners December Investor Presentation, slide 11
Holly Energy Partners made this list of excellent high income MLPs for a reason – the partnership’s current dividend yield is roughly four times as high as the average dividend yield within the S&P 500.
More specifically, Holly Energy Partners currently pays a quarterly dividend of $0.62 per share which yields 7.7% on the company’s current stock price of $32.11.
The following diagram compares Holly’s current dividend yield to its long-term average.
Holly Energy Partners’ current dividend yield is 7.7% and its average dividend yield over the past decade is 6.9%.
Based on dividend yield, Holly Energy Partners appears to be undervalued and right now might be a compelling buying opportunity for this stock. For more investment insights, you can read additional Sure Dividend Analysis on Holly Energy Partners below.
High Income MLP #8: TC Pipelines LP (TCP)
TC Pipelines is a midstream energy MLP with operations in Canada and the United States.
TC Pipelines’ general partner is the TransCanada Corporation (TRP), a Canadian midstream oil & gas corporation that is similar to Enbridge in many ways. Accordingly, TC Pipelines can be seen as a (much smaller) analogue to Spectra Energy Partners and its GP Enbridge.
TC Pipelines is well-known by its investors because of its exceptional total return history. Since the partnership’s inception since 1999, investors have realized outstanding 14% average annual returns.
Source: TC Pipelines Partnership Profile
TC Pipelines’ asset portfolio contains seven natural gas pipelines.
Like many midstream MLPs, TC Pipelines is exposed to no commodity price risk and very little volume risk. This is because it operates under long-term, ship-or-pay distribution contracts that do not depend on the price of the commodity being transported.
These two factors together mean that TC Pipelines does not have some of the risks associated with a traditional energy investment vehicle.
Source: TC Pipelines Partnership Profile
As mentioned, TC Pipelines’ general partner is TransCanada, which is a midstream energy corporation based in Canada and cross-listed on the Toronto Stock Exchange and the New York Stock Exchange.
TransCanada has a size and scale that dwarfs TC Pipelines – 56,900 miles of pipelines, 653 billion cubic feet of storage capacity, and the ability to transport ~25% of North America’s natural gas demand.
Source: TC Pipelines Partnership Profile
The size, strength, and performance of TransCanada is important because TransCanada and TC Pipelines work very closely together.
Like Holly Energy Partners and HollyFrontier, the two entities sometimes execute “dropdown transactions”, where the general partner (TransCanada) sells assets to the MLP (TC Pipelines).
For example, at the time of its last investor presentation, the two entities were working to execute the dropdown of a 49.3% interest in Iroquois Gas Transmission System LP and an 11.8% interest in the Portland Natural Gas Transmission System (PNGTS).
Source: TC Pipelines Partnership Profile
This MLP’s dividend yield is about 3.5x as high as the average dividend yield in the S&P 500, allowing it to qualify for this list of high income MLPs.
More specifically, TC Pipelines currently pays a quarterly dividend of $0.94 per unit which yields 7.1% on the company’s current stock price of $53.25.
The following diagram compares the current dividend yield of TC Pipelines to its long-term average.
TC Pipelines’ current dividend yield is 7.1% and its average dividend yield over the past decade is 7.0%. Since the MLP’s dividend yield is so close to its typical yield, the partnership is likely trading somewhere close to fair value.
You can read more Sure Dividend analysis on TC Pipelines below.
High Income MLP #7: Energy Transfer Equity (ETE)
Energy Transfer Equity is the parent company of the Energy Transfer family of companies, which includes Sunoco LP and Energy Transfer Partners (also listed in this article).
Energy Transfer Equity owns the general partner and 100% of the incentive distribution rights (IDRs) of both Sunoco LP and Energy Transfer Partners. Further, the parent MLP owns Energy Transfer LNG, which controls two midstream oils entities that operate in the Lake Charles region.
The full organization structure of Energy Transfer Equity and affiliated companies can be seen below.
What stands out about Energy Transfer Equity is its appealing level of business diversification.
The MLP has stakes in a wide variety of energy subsectors, including crude oil, natural gas, and natural gas liquids. Through its GP and LP stake in Sunoco, Energy Transfer Equity also has a secondary operating ownership of a diverse group of gas stations and other fuel distribution outlets.
The inherent diversification of Energy Transfer Equity extends to its geographic presence.
Although somewhat concentrated in Texas and the Northeast United States, Energy Transfer Equity’s diversified asset base gives it exposure to more oil-rich geographies and helps to isolated it from natural disasters and regional economic downturns.
From an income perspective, Energy Transfer Equity is highly appealing in today’s yield-hungry world.
Energy Transfer Equity currently pays a quarterly dividend of $0.2825 which yields 6.9% on the company’s current stock price of $16.45.
The following diagram compares Energy Transfer Equity’s current dividend yield to its long-term average:
Energy Transfer Equity’s current dividend yield is 6.9% and its average dividend yield over the past decade is 5.7%. Based on dividend yield, the company is meaningfully undervalued and merits further research.
You can read more Sure Dividend analysis on Energy Transfer Equity at the following link:
High Income MLP #6: Sunoco LP (SUN)
Sunoco LP is a retail and wholesale fuel distribution MLP with ~1,355 retail locations and wholesale distribution arrangements with ~7,825 dealers, distributors, and commercial customers.
Sunoco is a member of the Energy Transfer family of companies. Sunoco’s general partner and 100% of the MLP’s incentive distribution rights are owned by Energy Transfer Equity. ETE also has a ~2.3% limited partner stake in Sunoco.
Source: Sunoco LP May 2017 Investor Presentation, slide 3
Sunoco was founded way back in 1920, when the company opened its first service station in Pennsylvania. The company expanded rapidly over time and became the official fuel sponsor of NASCAR in 2004.
In 2012, Sunoco was acquired by Energy Transfer Partners (also a member of the Energy Transfer family of companies) before being eventually spun-off in 2014. A dropdown process saw Sunoco assume ownership of all of the Energy Transfer family’s retail and wholesale assets in 2016.
Source: Sunoco LP May 2017 Investor Presentation, slide 5
Sunoco is executing a major strategic transition right now.
The company recently announced the sale of the majority of its retail convenience stores, with the acquirer being 7-Eleven.
Fortunately, Sunoco is no stranger to mergers & acquisitions. The company has executed over $700 million of diversified M&A since December 2014.
Source: Sunoco LP May 2017 Investor Presentation, slide 6
Post-transaction, Sunoco will be focused exclusively on wholesale fuel distribution.
This business is economically attractive from a number of perspectives, benefiting from reliability demand, capital-light operations relative to retail fuel distribution, and long-term contracts with creditworthy counterparties.
Source: Sunoco LP May 2017 Investor Presentation, slide 8
Investors are paid handsomely to wait as Sunoco completes this strategic transition.
Sunoco currently pays a quarterly dividend of $0.8255 which yields 11.0% on the company’s current stock price of $29.92.
The following diagram compares Sunoco’s current dividend yield to its long-term dividend yield.
Sunoco’s current dividend yield is 11.0% and its average dividend yield over the past decade is 7.4%. Based on dividend yield, Sunoco appears significantly undervalued.
However, Sunoco is currently paying an unsustainable dividend. The partnership had a distribution coverage ratio of 0.74 in the last quarter and 0.88 over the past four quarters.
Accordingly, this MLP is at risk of a dividend cut, although the divestiture of its retail assets will likely shore up its balance sheet and improve its dividend coverage.
If you’re interested in researching this MLP in more detail, the following Sure Dividend article will be of interest:
High Income MLP #5: AmeriGas Partners LP (APU)
AmeriGas Partners is a propane distribution MLP and the largest propane distributor in the United States. The MLP’s general partner is the UGI Corporation, which also holds a 26% limited partner stake (high for a general partner).
The partnership serves 1.9 million customers in all 50 states through 54,000 retail cylinder exchange locations operated by 8,300 employees.
Source: AmeriGas Partners 2016 Investor Day Presentation, slide 58
AmeriGas Partners operates in four segments:
- Residential Heating & Cooking
- Motor Fuel
- Agriculture & Transport
Each segment’s contribution to revenue can be seen below.
Source: AmeriGas Partners 2016 Investor Day Presentation, slide 59
What stands out about AmeriGas is its unprecedented size in the highly fragmented propane distribution industry.
The company has a 15% market share and dominates this industry.
Source: AmeriGas Partners 2016 Investor Day Presentation, slide 62
Accordingly, a large component of AmeriGas’ growth story has been acquisitions.
The partnership estimates that there exists 3,500 acquisition opportunities in the domestic propane distribution industry, and has executed 15 acquisitions in the last two years alone.
Looking further back, AmeriGas has closed ~200 acquisitions since the early 1980s.
Source: AmeriGas Partners 2016 Investor Day Presentation, slide 68
This partnership is highly rewarding from an income perspective, with a current dividend yield more than four times as high as the average dividend yield within the S&P 500.
AmeriGas currently pays a quarterly distribution of $0.95 per unit which yields 8.3% on the company’s current stock price of $45.95.
The following diagram compares AmeriGas’ current dividend yield to its long-term average.
AmeriGas’ current dividend yield is 8.3% and its average dividend yield over the past decade is 7.5%. The company appears slightly undervalued and may benefit high income investors.
You can read more Sure Dividend analysis on AmeriGas Partners at the following link:
High Income MLP #4: Enterprise Products Partners (EPD)
Enterprise Products Partners is one of the largest and most well-capitalized MLPs. The partnership has a current market capitalization of $57.2 billion.
Enterprise Products Partners’ general partner is owned by EPCO. Notably, EPCO also owns 32% of Enterprise Products Partners’ limited partner units, creating a significant alignment of interests between the general partner and the limited partners.
Enterprise Products Partners is well-known among high income investment community because of its size, stability, and stable track record across multiple market cycles.
The partnership has grown its distributions at a rate of ~6.5% over the past thirteen years and has seen its distributable cash flow increase in recent years even in light of rock-bottom oil prices.
The driver of this strong fundamental performance is the partnership’s high levels of cash flow.
Over the twelve months ending March 31, Enterprise Products Partners generated $5.4 billion of gross operating margin and has been investing heavily in high-quality sources of cash flow such as pipelines and other commodity-isolated revenue sources.
Enterprise Products Partners is one of the most well-known securities with a dividend yield above 5%. In fact, the company’s yield is nearly three times as high as the average yield within the S&P 500.
Enterprise Products Partners currently pays a quarterly dividend of $0.415 which yields 6.2% on the company’s current stock price of $26.82.
The following diagram compares the company’s current dividend yield to its long-term historical average.
Enterprise Products Partners’ current dividend yield is 6.2% and its average dividend yield over the past decade is 5.7%. This slight undervaluation presents a notable opportunity to initiate ownership in one of the most well-capitalized and stable MLPs.
You can read more Sure Dividend analysis on Enterprise Products Partners at the following link:
High Income MLP #3: Buckeye Partners LP
Buckeye Partners is a oil & gas master limited partnership that operates in two distinct segments:
- Domestic Pipelines & Terminals
- Global Marine Terminals
The company also has a much smaller Merchant Services segment. Details about each operating segment and 2016’s financial performance can be seen below.
Source: Buckeye Partners 2017 Annual Meeting Presentation, slide 7
Recent years have seen Buckeye focus heavily on diversifying away from its domestic pipelines and terminals business, which has historically been its largest contributor to both revenue and EBITDA.
The partnership’s method of doing so has been to invest extensively in its global marine terminals business.
Earlier this year, the partnership invested in a 50% equity interest in VTTI, a globalized marine terminals business. Last quarter was the first full reporting period that included the VTTI equity interest, and the partnership is close to achieving a 50/50 EBITDA mix between pipelines and terminals.
This can be seen below.
Source: Buckeye Partners 2017 Annual Meeting Presentation, slide 8
It is only by looking back over long periods of time that the true impact of this transformation can be understood.
In 2010, Buckeye Partners derived 92% of its adjusted EBITDA from the Domestic Pipelines & Terminals segment.
In the past twelve months, this figure has declined to 55%.
Buckeye’s increasing business diversification has been primarily driven by acquisitions. The partnership has acquired more than 75 domestic and international storage terminals with more than 130 million barrels of storage capacity.
Source: Buckeye Partners 2017 Annual Meeting Presentation, slide 10
Buckeye stands out even among this list of high income MLPs because of its unique combination of safety and yield.
Buckeye Partners currently pays a quarterly dividend of $1.25 per unit which yields 8.2% on the company’s current stock price of $61.34. Furthermore, the partnership has a distribution coverage ratio of 1.08x.
The following diagram compares the MLP’s current dividend yield to its long-term historical average.
Buckeye Partners’ current dividend yield is 8.2% and its average dividend yield over the past decade is 6.9%. Given its elevated dividend yield, right now presents a solid opportunity to add to or initiate a stake in this high-quality MLP.
You can read more Sure Dividend analysis on Buckeye Partners at the following link:
High Income MLP #2: Genesis Energy LP (GEL)
Genesis Energy is a midstream oil & gas MLP that was founded in 1996.
The partnership provides an integrated suite of services to refineries and oil producers through its four operating divisions:
- Offshore Pipeline Transportation
- Refinery Services
- Marine Transportation
- Supply & Logistics
More details about the partnership’s business model can be seen below.
Source: Genesis Energy May 2017 Investor Presentation, slide 3
Genesis Energy is differentiated from its peers because of its uniquely diversified asset base. The company operates in many segments of the energy industry, from oil to CO2.
This trend can be seen in Genesis’ asset base: 580 miles of onshore oil pipelines, 270 miles of onshore CO2 pipelines, 2,500 miles of offshore pipelines, 83 barges, 43 push boats, 1 offshore oil tanker, ~3.3 million barrels of storage, and a land fleet composed of ~200 trucks, ~400 trailers, and ~525 railcars.
Source: Genesis Energy May 2017 Investor Presentation, slide 4
The partnership also has an exceptionally high dividend yield.
Genesis Energy currently pays a quarterly dividend of $0.72 which yields 9.7% on the company’s current stock price of $29.75.
The following diagram compares the MLP’s current dividend yield to its long-term historical average dividend yield.
Genesis Energy’s current dividend yield is 9.7% and its average dividend yield over the past decade is 6.3%. Genesis appears to be remarkably undervalued at current prices and merits investment from investors looking for current dividend income.
You can read more Sure Dividend analysis on Genesis Energy at the following link:
High Income MLP #1: Energy Transfer Partners (ETP)
Energy Transfer Partners is the flagship investment vehicle of the Energy Transfer family of companies.
The partnership reinvented itself in late April when it merged with Sunoco Logistics (another previous member of the Energy Transfer family). The pro-forma company is anticipated to be the largest midstream MLP based on EBITDA and the second-largest midstream MLP based on enterprise value (behind Enterprise Products Partners, another MLP on this list).
The merger was strategic on a number of levels.
First and foremost, it avoided a likely dividend cut from the old Energy Transfer Partners as the legacy partnership spread its debt load over a larger base of high-quality operating assets.
Secondly, it creates a more diversified business model.
The old Sunoco Logistics was primarily involved in liquids distribution while the old Energy Transfer Partners was primarily involved in natural gas distribution.
Other key elements of the transformational merger can be seen below.
Like many sizeable corporate mergers, a key component of the SXL/ETP merger is the opportunity to take advantage of cost synergies.
In particular, the two partnership’s identified four projects that are prone to synergy optimization. These can be seen below.
The new Energy Transfer Partners is expecting low double-digit distribution growth for the foreseeable future.
The entity already has a distribution yield in the double-digits, which gives the partnership a unique combination of yield and growth for high income investors.
More specifically, Energy Transfer Partners currently pays a quarterly dividend of $0.535 which yields 11.2% on the company’s current stock price of $19.19.
Prior to the merger, SXL had a median dividend yield of 6.1% and ETP had a median dividend yield of 5.9% (both since inception). Regardless of which parent company the new ETP is compared to, the current 11.2% dividend yield is priced at a substantial discount to historical levels.
You can read more Sure Dividend analysis on Energy Transfer Partners at the following links:
This article provides evidence that there are many high-quality, high-yield master limited partnerships that trade on the public markets.
However, MLPs are not the only high-yield securities that investors should consider. Corporations, REITs, and BDCs can also be sources of reliable and growing dividend income.
To that end, the Sure Retirement Newsletter systematically identifies and ranks securities with 5%+ dividend yields using The 8 Rules of Dividend Investing, helping to take the guesswork out of security analysis for high income investors.