Scrutinizing the Top Performing MLPs for Current Yield, Dividend Growth and Total Return
Investment in MLPs gives investors a means of acquiring a substantial yield from their investment in a realm of trading that is largely targeted to the retail investor and not the institutional investor.
Master Limited Partnerships focus on the benefits of tax structure while still possessing the traditional attributes of a common individual stock. As an investor, this is an appealing structure because the MLP will often distribute upwards of 90% of their total income to their Limited Partners via dividend payments.
The corporation realizes no tax at the company level and the responsibility of taxes is passed onto the investor, the benefit being the lack of double taxation at the corporate and retail investor level. This helps the company recognize a lower cost of capital and can be beneficial to their capital structure. This arrangement can often result in dividends ranging anywhere from 2% – 15% on a sustained basis.
According to the EnerCom Inc. “MLP Scorecard” report that is emailed to subscribers each Monday, the top 10 current yields available as of April 24, 2015, range from a high of 15.4% to a low of 9.8%. Current yield is defined as the most recent dividend paid annualized based on dividend frequency and divided by current market price.
The top 10 MLPs for current yield are:
- New Source Energy Partners (ticker: NSLP): 15.4%
- Alon USA Partners (ticker: ALDW): 13.8%
- Memorial Production Partners (ticker: MEMP): 12.7%
- EV Energy Partners (ticker: EVEP): 11.5%
- Eagle Rock Energy Partners LP (ticker: EROC): 11.0%
- Legacy Reserves LP (ticker: LGCY): 10.6%
- American Midstream Partners LP (ticker: AMID): 10.3%
- Crestwood Midstream Partners LP (ticker: CMLP): 10.3%
- Southcross Energy Partners LP (ticker: SXE): 10.1%
- Calumet Specialty Products Partners LP (ticker: CLMT): 9.8%
For comparison, the minimum current yield recorded in the MLP Scorecard report is currently 2.1%.
Long term profitability can often equate to success for a company with an MLP structure. The substantial yields created by MLP’s often beg the question of “are they sustainable?”
Given that MLP’s will distribute much of their cash flow per quarter, the will often take on large amounts of debt to finance operations. Being able to capitalize in the use of debt and turn that back into cash flow can be indicative of some of the stronger MLP’s in the game. If a company falls into the realm of needing to raise equity or take on debt in order to cover their dividends, it can quickly lead to disaster.
Another metric that is tracked in the MLP Scorecard is the Dividend Compound Quarterly Growth Rate (CQGR). This is a measure of companies that are not only generating enough cash flow to cover their distributions, but growing their distributions.
The 10 MLPs that have maximized dividend growth year-over-year are:
- Valero Energy Partners LP (ticker: VLP): 63.7%
- BreitBurn Energy Partners LP: (ticker: BBEP): 37.8%
- Phillips 66 Partners LP (ticker: PSXP): 19.6%
- Emerge Energy Services LP (ticker: EMES): 13.2%
- Sprague Resources LP (ticker: SRLP): 12.8%
- Plains GP Holdings LP (ticker: PAGP): 11.1%
- Western Gas Equity Partners LP (ticker: WGP): 10.0%
- Rose Rock Midstream LP (ticker: RRMS): 8.3%
- Hi-Crush Partners LP (ticker: HCLP): 7.3%
- Energy Transfer Equity LP (ticker: ETE): 6.8%
One of the benefits of an MLP is that it pays larger dividend and still has the attributes of common stock. Like stocks, MLPs are traded on a daily basis with the ability to generate share price appreciation. Stocks that increase their profitability are desirable; stocks that increase their dividends over time are also desirable.
But company stocks (or in this case MLPs) that can deliver continued profitability with an increased dividend and still deliver capital appreciation could be the trifecta of MLP investment.
The Trifecta of MLP Investment
The 10 MLPs that lead the pack in total return (share price appreciation over the last 12 months and dividend yield combined) are:
- Energy Transfer Equity LP (ticker: ETE): 45.5%
- Enbridge Energy Partners LP (ticker: EEP): 42.5%
- MPLX LP (ticker: MPLX): 40.5%
- TC PipeLines LP (ticker: TCP): 38.5%
- Delek Logistics Partners LP (ticker: DKL): 36.3%
- Western Gas Equity Partners LP (ticker: WGP): 35.8%
- Marlin Midstream Partners LP (ticker: FISH): 34.4%
- Phillips 66 Partners LP (ticker: PSXP): 33.4%
- Sprague Resources LP (SRLP): 31.0%
- Rose Rock Midstream LP (ticker: RRMS): 30.6%
While MLP investors are largely swayed by dividend yield as a reason for entering the MLP investment realm, dividends alone cannot be the driving force.
The dividend needs to be sustainable and the company needs to be able to generate the cash flow necessary to fund the dividend. A growth in dividends can be a sign of a growing company or a company that is finding increased efficiencies in operations, but is not a sure fire way to invest.
Total return can account for not only the dividend that has been paid, but also the growth in dividends combined with the appreciation of share price over the past 12 months. While these numbers can’t be relied on to always uncover a true winner to the ideal investment opportunity, they can be used as a guide to help during the investment analysis stage.
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