Searching for Yield: Master Limited Partnerships

A recent search for yield turned up a large number of master limited partnerships -- MLPs -- and that warrants a deeper look at these yield machines.

MLPs are publicly traded partnerships engaged in real estate, natural resources, or commodities operations. Some typical MLP businesses include oil or natural gas pipelines and terminals and energy exploration and production. MLPs trade units instead of shares and pay distributions instead of dividends. The partnerships pass their income and tax liability on to unitholders. The requirement to pass income through to unitholders drives the high yields often found in the sector.

The Motley Fool's master limited partnership tag lists 44 partnerships. Twenty-five of those companies are rated five stars (out of five) by our CAPS investing community. The table below lists some of the larger five-star companies.

Name

Current Yield

Market Cap
($ billion)

Distribution Growth Rate
(5-year CAGR)

Enterprise Products Partners (NYSE: EPD  )

5.2%

44.7

5.8%

Kinder Morgan Energy Partners (NYSE: KMP  )

6.3%

29.1

7.4%

Williams Partners (NYSE: WPZ  )

6.6%

17.3

8.0%

Plains All American Pipeline (NYSE: PAA  )

4.8%

15.1

5.3%

El Paso Pipeline Partners (NYSE: EPB  )

6.3%

8.0

17.9%*

Source: Yahoo! Finance and author's calculation. CAGR = compound annual growth rate. * Four-year CAGR, company has not been in operation for five years.

Enterprise Products operates natural gas, oil, product, and petrochemical pipelines, storage facilities, and other energy processing and transportation assets. Over the past five years, Enterprise has increased its distribution every quarter.

Kinder Morgan operates natural gas and products pipelines, storage terminals, and carbon dioxide transportation and related oil production fields. There have been no distribution decreases for at least the past five years.

Williams has natural gas transportation, gathering, treating, processing, and storage assets along with natural gas liquid fractionation and oil transportation operations. Like Kinder Morgan, the distribution has been raised or held steady every quarter for the past five years.

Plains All American transports, stores, and markets crude oil, refined products, and natural gas liquids. Put one more in the lots of distribution increases, no decreases category for the past five years.

El Paso Pipeline is a member of the Kinder Morgan (NYSE: KMI  ) family focused on natural gas pipelines and storage facilities. Its first distribution was recorded in January 2008 and every quarter since has been a higher payout.

Risks and issues with MLPs include:

  • A weak economy would reduce demand for energy.
  • A government starved for revenue could eliminate tax advantages.
  • Higher interest rates would increase capital costs and lower unit prices as other investments look more attractive.
  • Since income is passed to unitholders, unit offerings and borrowing are about the only ways to raise capital.
  • Tax information is reported on a K-1 form complicating tax returns a bit.

A quick look like this is a starting point for further research, not a recommendation to buy. That said, investors looking for growing income should spend a little energy learning more about these partners in yield.

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