3 High-Yield MLPs for Big Income
These master limited partnerships offer above-average distribution yields attractive for income seekers.
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When a stock offers an exceptionally high dividend yield, it usually signals that a dividend cut may be just around the corner. Therefore, investors should not purchase high-yield stocks without being certain that the dividend is safe. With that said, not all the high-yield stocks offer dividends on the brink of being cut.
Let's discuss the prospects of three high-yield master limited partnerships (MLPs), which offer above-average distribution yields.
High-Yield MLP #1
Plains All American Pipeline, L.P. PAA is a midstream energy infrastructure provider. The MLP owns an extensive network of pipeline transportation, terminalling, storage, and gathering assets in key crude oil and natural gas liquids producing basins at major market hubs in the United States and Canada.
On average, Plains All American handles more than 7 million barrels per day of crude oil and NGL through 18,370 miles of active pipelines and gathering systems. The MLP generates around $40 billion in annual revenues and is based in Houston, Texas.
On February 9, Plains All American reported its Q4 and full-year results for the period ending December 31, 2023. For the quarter, revenues came in at $12.7 billion, down 1.9% compared to last year. Adjusted EBITDA from crude oil increased by 12% year over year, mainly due to higher volumes across the partnership’s pipeline systems, contributions from acquisitions, and the benefit of tariff escalation.
Adjusted EBITDA from NGL rose 12% year over year, primarily due to favorable NGL basis differentials and additional market-based opportunities partially offset by the divestiture of the partnership’s interest in the KFS facility and increased field operating costs. Thus, adjusted EBITDA totaled $737 million for the quarter, up 12% compared to Q4 2022. Distributable cash flows (DCF) rose by 17%, $0.68 on a per-unit basis. For the year, DCFU rose to $2.46.
Plains All American has a number of minimum volume commitment contracts that support relatively stable revenues in its pipelines (transportation) segment. These contracts have an average remaining term of around five years.
The MLP anticipates targeting annualized common distribution increases of approximately $0.15 per unit each year until reaching a targeted unit distribution coverage ratio of approximately 160%. Its payout ratio is currently sitting at relatively comfortable levels of 50%.
PAA stock currently yields 7.7%.
High-Yield MLP #2
Star Group, L.P. SGU is a home heating oil and propane distributor and services provider. The partnership was founded in 1995 as Star Gas Partners, L.P., and changed its name to Star Group, L.P. in October 2017.
Star's Petro Holdings subsidiary provides heating oil and propane to 416,000 U.S. Northeast and Mid-Atlantic customers. In addition, it also sells diesel and gasoline to customers across the United States.
Star is the nation's largest home heating oil retail distributor, giving it a competitive advantage. It has a strong market position in the home heating oil and propane distribution industry and has maintained a steady market share in recent years.
The partnership operates in two revenue segments: Home Heating Oil and Propane and Other Products and Services, including commercial heating and HVAC services, equipment installations, and repair and maintenance services.
On December 6, Star announced its Q4 results for the fiscal year 2023. It reported revenues of $266.94 million for the quarter, down 10.0% year over year, reflecting a drop in average selling prices and overall sales volume. For the quarter, Star reported a 10% decline in total revenue, reaching $266.9 million, primarily due to lower selling prices and a slight decrease in petroleum product demand.
Despite these challenges, Star's net loss improved, narrowing by $30.3 million to -$19.7 million, largely thanks to a favorable change in derivative instruments, offset by reduced income tax benefits and increased depreciation costs.
Considering the seasonality of this business and the limited growth prospects of the industry, we forecast EPS growth of 5.0%, below the company's historical averages. The consistent share count reduction throughout the past years has decently rewarded investors with higher earnings yield. With a payout ratio of 72%, the payout appears secure.
SGU currently yields 6%.
High-Yield MLP #3
Enterprise Products Partners EPD is a midstream MLP, with a vast network of pipelines and storage tanks. The difference is that Enterprise Products Partners is focused primarily on natural gas.
Its network includes nearly 50,000 miles of pipelines of natural gas, natural gas liquids, crude oil and refined products. It also has storage capacity of more than 250 million barrels.
Enterprise Products Partners has a very similar business model with that of Magellan and MPLX L.P. MPLX. It charges fees that are proportional to the volumes transported and stored throughout its network and has minimum-volume requirements in order to receive reliable cash flows even under the most adverse business conditions. The merits of this business model were in full display in 2020, when the MLP posted a benign 15% in its distributable cash flow per unit.
Enterprise Products Partners reported its Q4 2023 financial results on February 1, showcasing a strong performance that exceeded analysts' expectations. The MLP announced adjusted earnings per limited partner unit of $0.72, showing an increase from the previous year's $0.65.
This achievement was driven by robust operating margins from Enterprise Products Partners' fee-based businesses and improved margins in its propylene and octane enhancement businesses. During the quarter, it experienced a significant increase in pipeline volumes across NGL, crude oil, refined products, and petrochemicals, totaling 7.8 million barrels per day (bpd), up from 6.9 million bpd in the same quarter of the previous year.
Natural gas pipeline volumes also saw an uptick, amounting to 18.7 trillion British thermal units per day (TBtus/d), compared to 17.6 TBtus/d in the prior year.
Enterprise Products Partners has raised its distribution for 26 consecutive years. It also has a solid payout ratio of 57% and one of the strongest balance sheets in the MLP universe, with a BBB+ credit rating from S&P and a Baa1 rating from Moody’s. Thanks to its solid payout ratio, its financial strength and its defensive business model, the MLP is likely to continue raising its distribution for many more years.
EPD is currently offering a 7.5% distribution yield.
At the time of publication, Ciura had mo positions in any stocks mentioned.