This is a guest contribution by Bob Ciura of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.
With stock prices near record highs, combined with historically low interest rates, investment income is much more difficult to find. Yields across fixed income and equities have fallen significantly over the past few years. Today, the S&P 500 Index has an average dividend yield of just 1.5%. This presents income investors with a tremendous challenge.
Master Limited Partnerships, or MLPs, have traditionally been a good source of high-yielding securities. Many Master Limited Partnerships yield 5% or more, even double-digit yields in some cases. Of course, investors should not simply chase the highest yields—some high-yielding stocks have poor fundamentals and end up cutting their payouts to investors.
The following three MLPs have high yields, and equally important, secure payouts.
High-Yield MLP #1: Enterprise Products Partners (EPD)
Enterprise Products Partners is arguably the safest MLP. It combines a high-quality network of premier assets with a long history of steady distribution growth, and a healthy balance sheet. In short, it has all of the core qualities that investors should look for when selecting MLPs.
Enterprise Product Partners is a midstream MLP with services including storage and transportation of oil and gas. Its assets include approximately 50,000 miles of pipelines, 260 million barrels of storage capacity for Natural Gas Liquids (NGL), crude oil, and other refined products; and 14 billion cubic feet of natural gas storage capacity.
The company remained resilient in 2020, even with the coronavirus pandemic as a major drag on the U.S. economy. Fourth-quarter EBITDA increased by 1.8% year-over-year and distributable cash flow remained flat year-over-year. For the full year, adjusted EBITDA declined by just 0.8%, while distributable cash flow declined just 3% from the prior year.
Because of its strong assets and resilient cash flow, Enterprise Products has been able to raise its distribution for 22 years in a row. This is a very long history of annual payout growth, particularly for an MLP.
The distribution is secure, thanks in large part to the company’s strong balance sheet. Enterprise Products has an investment-grade credit rating of BBB+ from Standard & Poor’s and Baa1 from Moody’s. These are unusually high credit ratings for an MLP. In addition, Enterprise Products reported a distribution coverage ratio of 1.6x in the fourth quarter. This is a strong coverage ratio which indicates the distribution payout is secure.
With a high yield of 8.2% and a high level of safety, EPD is a top pick in the MLP space.
High-Yield MLP #2: Magellan Midstream Partners (MMP)
Magellan Midstream Partners is similar to Enterprise Products Partners in terms of its business quality and long history of steady distributions. MMP is also a midstream operator with storage and transportation assets. It has the longest pipeline system of refined products in the U.S., which is linked to nearly half of the total U.S. refining capacity. Its network of assets includes 9,800 miles of pipeline, 54 storage terminals, and 46 million barrels of storage capacity.
MMP was slightly more impacted by the coronavirus pandemic and weak business conditions last year, as distributable cash flow per share declined 18% for the year. However, MMP still maintained its distribution with a distribution coverage ratio of 1.13x. MMP expects to maintain its distribution for 2021; prior to the onset of the pandemic, MMP had increased its distribution payout for nearly 20 years in a row.
Like EPD, MMP also has a high credit rating of BBB+ from Standard & Poor’s and Baa1 from Moody’s. A high credit rating greatly helps MLPs as it reduces the cost of raising debt to fund new projects. MMP has a modest level of overall debt with a leverage ratio of 3.2x as of September 2020. This is a much lower level of debt than many other MLPs, some of which have leverage ratios above 4.0x or even 5.0x.
MMP has a high distribution yield of 9.9%. Importantly, the distribution payout appears secure, as MMP management expects to return to a distribution coverage ratio of 1.2x as the economy recovers.
High-Yield MLP #3: MPLX LP (MPLX)
MPLX is a particularly interesting MLP for income investors, as it has a very high yield of 10.9%. MPLX is a diversified midstream MLP. Its assets include crude oil and refined products pipelines; terminals; crude oil and natural gas gathering systems; natural gas and NGL processing and fractionation facilities; and more.
In 2020, MPLX posted distributable cash flow of $4.12 per unit, was a decline of 9% from the previous year. However, MPLX had a distribution coverage ratio of 1.46x for the year. Debt remained under control with a leverage ratio of 3.9x for 2020.
MPLX has a positive growth outlook, as the economy continues to recover from the coronavirus pandemic which will be a major help to the entire energy sector. It also has projects under development. MPLX in particular has a strong position in the Marcellus / Utica region, with long-term contracts from Marathon.
MPLX’s industry generally holds competitive advantages as a result of the toll-booth model of pipelines. While growth potential may be limited, the need for the company’s infrastructure is certainly present. With MPLX in particular we are encouraged by the company self-funding on the equity side and getting rid of the IDRs.
It has also had strong coverage ratios. In the past five years, MPLX’s distribution coverage ratio never fell below 1.23x. Meanwhile, in the past five years the company’s total debt to adjusted EBITDA ratio, otherwise known as the leverage ratio, has been under 4.0x in every year except one. Therefore, MPLX has demonstrated the ability to maintain sufficient distribution coverage while keeping its debt levels at reasonable levels. This has come in a fairly difficult period for the energy industry, due to weak commodity prices.
MPLX has a higher yield than EPD and MMP. Elevated yields are often a signal of elevated risk, but MPLX has satisfactory DCF coverage and its leverage ratio remains below 4.0x. These factors helped MPLX maintain its distribution last year. It also helps the company that it faces no maturities of senior notes in 2021.