2 Small MLPs With Safe 8+% Yields

Vanguard Natural Resources and QRE Energy are two high-quality E&P MLPs that offer income investors the perfect trifecta of high yield (paid monthly), strong distribution growth, and capital gains.

Apr 30, 2014 at 12:55PM

One of The Motley Fool's goals is to teach investors to invest sustainably. Specifically, this means investing with solid fundamental principles that have worked in the past and are likely to work in the future as well. One of these principles is the importance of dividend/distribution yield (and reinvestment) and how it can help investors achieve financial independence during retirement. 

A rule of thumb for retirement is that individuals should cash out no more than 4% of their portfolio annually to live on (to avoid running out of money). My goal is to help investors avoid selling shares (or units) of great companies and live exclusively off dividends/distributions. This requires two things.

First, a yield of 4% or greater and second, dividend/distribution growth greater than 4% (to outpace inflation and preserve buying power). Inflation has averaged 3.22% since 1913 and about 2% since 2000. So a 4% growth rate is double the rate of recent inflation. 

Of course, the 4% rule of thumb assumes an investor has a portfolio of sufficient size (4% yield on $750,000 portfolio=$30,000/year in retirement), and many people haven't been able to save that much. Thus, I'm always on the hunt for great companies that yield more than 4%, preferably double that (8%) or more, to help less affluent investors thrive during retirement. 

One final criteria I like to see is monthly dividend/distribution payments. Bills and other living expenses must be paid on a monthly basis so it's nice to see companies pay on the same schedule. 

The following two companies offer income investors of all kinds (both young and old) high, secure yields and strong long-term distribution growth prospects.

Vanguard Natural Resources (NASDAQ:VNR) is a fast-growing E&P (exploration and production) MLP that focuses primarily on gas production. The fundamental growth story that is likely to fuel its strong distribution growth (5.78% CAGR over the last seven years) can be summarized in three parts.

First, Vanguard is a master of accretive acquisitions. Since IPOing in 2006 the partnership has made 20 purchases totaling $3.4 billion. Its most recent, a $581 million acquisition of Wyoming natural gas fields, increases its total reserves by 80% and production by 55%. Management has since announced an aggressive investment program to increase production yet further.

The second catalyst is dropping production costs. Due to increased economies of scale Vanguard is guiding for 2014 production costs of just $6-$7/barrel of oil equivalent, a 50% decrease from 2011 levels. Current production is also aggressively hedged at very favorable levels: 80% of gas through 2017 hedged at $4.42/Mbtu, 80% of oil through 2015 hedged at $93.07/barrel. These hedges represent a 30% and 12.7% increase in gas and oil prices over what the partnership received in 2013.

Due to its aggressive growth strategy (both acquisition-fueled and organic) the partnership is guiding for:

  • 2014 production to increase by 46%-56% 
  • 2014 Adjusted EBITDA to increase by 30%
  • Capital expenditure (capex) to increase of $57 million

Given the guidance capex figures we can determine a likely $48 million in additional distributable cash flow in 2014. This would raise the distribution coverage ratio from 1 in 2013 to 1.24, ensuring distribution security, and allowing for solid growth going forward.

QR Energy (NYSE:QRE) is a smaller and newer E&P MLP, one primarily focused on oil (68% of reserves) as opposed to natural gas. The partnership is well situated to take advantage of the oil boom in the Permian Basin  in east Texas, the Woodford Shale in Oklahoma, and along the Gulf Coast. The distribution growth story for QRE can be summarized in two points. 

First, the partnership's small size creates a small base to grow quickly from. For example, in the third quarter of 2013 revenues increased by 20% and distributable cash flow (DCF) by 26%. When combined with the second catalyst, future distribution growth seems likely. 

The second catalyst is the partnership's recent buyout of its general partner. This ended the very unitholder-unfriendly management fee structure in which management was paid in unit grants that diluted existing investors (up to 10% per quarter). The terms of the buyout include one final 20% dilution, but spaced out over four years. The deal is immediately 7% accretive to DCF/unit, and with the distribution coverage ratio at a healthy 1.2 future distribution growth should be strong. 

Foolish takeaway
Both Vanguard Natural Resources and QRE Energy make for fantastic long-term investments -- no matter what stage in life an investor is in. Young investors can benefit from high yields and monthly compounding to grow wealth while retirees can enjoy secure, monthly income to cover living expenses. Both companies enjoy strong growth catalysts, secure distributions, and distribution growth rates that are likely to preserve and grow wealth over time. 

How America's energy boom can grow your wealth
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


Adam Galas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers