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2 Hot Dividend Stocks to Buy Today

In the first quarter of 2014 America smashed through its previous oil production record of 9.7 million barrels/day (bpd), set in 1970, to achieve a staggering 11 million bpd and become the world's largest oil producer. 

The Energy Information Administration (EIA) predicts US gas production will increase 56% by 2040. 

Shale formations such as the Marcellus and Utica are expected to increase their production 34-fold between 2007 and 2035. 

IHS Global, a leading information and analytics company, believes that by 2026 the US will require $890 billion in additional energy investment, in things like new pipelines, storage, and processing facilities. They estimate this will create as many as 1.1 million jobs and add $120 billion/year to the economy, resulting in a 0.71% increase in the GDP growth rate.

With such staggering sums bandied about investors need to know where they can invest to profit from this historical bonanza. This article outlines two excellent pipeline MLPs that are poised to make long-term investors exceedingly rich in the years to come. 

Note, these two MLPs pay distributions, not dividends. The difference is that distributions are tax deferred and require a K-1 form instead of a 1099 form. They can cause tax headaches when held in tax deferred accounts such as IRAs.  

MLP Yield 10 Year Projected Annual Earnings Growth 10 Year Projected Distribution Growth 10 Year Projected Annual Total Returns
Magellan Midstream Partners 3% 14.10% 14.29% 11.10%
MarkWest Energy Partners 5.10% 62.20% 37.50% 67.10%

Sources: S&P Capital IQ, Yahoo! Finance

Magellan Midstream Partners (NYSE: MMP  ) and MarkWest Energy Partners (NYSE: MWE  ) have both handily outperformed the market in the last 13 years, with Magellan Midstream being one of the best investments of the last decade. 

MMP Total Return Price Chart

MMP Total Return Price data by YCharts

There is good reason for this outperformance, and strong growth catalysts for Magellan Midstream to continue beating the market over the next decade, although not to the previous extent. 

The case for Magellan Midstream Partners 
Magellan Midstream Partners is the largest refined fuels pipeline operator in America, with 9,500 miles and 54 distribution terminals.

The key to Magellan Midstream's success has been its cost structure and management. For example, Magellan Midstream bought out its general partner in 2009, at the peak of the financial crisis, for just eight times earnings before interest, taxes, depreciation, and amortization (EBITDA). This removed its incentive distribution rights and lowered its cost structure substantially, allowing it to grow its distributions by 13% annually for 13 years.

Magellan Midstream's management is one of the best at taking advantage of opportunistic acquisitions. In 2010 after the BP oil spill, BP was forced to sell assets -- Magellan acquired $289 million worth of oil storage and petroleum pipelines for just 8-9 times EBITDA.

Over the last decade Magellan Midstream has shown the same knack for deals, executing $3.7 billion in accretive acquisitions and organic investments. 

Nearly all of Magellan's acquisitions and projects pay for themselves in 3-10 years. Two examples of Magellan's disciplined investment approach are its Longhorn and Double Eagle pipelines.

The Longhorn pipeline is an oil pipeline from the Permian Basin to Houston. Its expansion increases its capacity by 50,000 bpd, costs $430 million, but will pay for itself in only three years. It comes online in early 2015. 

The Double Eagle pipeline is a joint venture with Kinder Morgan that will transport 100,000 bpd of condensates from the Eagle Ford shale to Magellan's Corpus Christi condensate splitter, which will have a capacity of 50,000 bpd of condensate. It will cost $250 million, allow for exports of ultra-light crude, and pay for itself in just six years.

Interested investors should dollar-cost average into Magellan Midstream due to its current valuation, a well deserved but lofty 23 times cash flows -- double its historical average.

MarkWest Energy Partners: pipeline king of the Marcellus shale
MarkWest Energy Partners is the leading pipeline provider for the Marcellus, Utica, and Haynessville shales. The Haynesville shale is set to supply the coming LNG export boom along the Gulf Coast.

In the Marcellus MarkWest operates 73% of gas processing capacity with plans to expand by 62% by 2015.  In the Utica shale Markwest operates 43% of processing capacity with plans to double its capacity by 2015. In total MarkWest Energy Partners plans to open 11 new processing plants within the next 18 months, bringing its total processing capacity across its entire network to 7 billion cubic feet/day, a seven-fold increase in just 10 years.
MarkWest is also investing heavily into natural gas liquids (NGLs), whose production is projected to increase 60% over the next decade to over 1 million bpd. MarkWest is partnering with Targa ResourcesSunoco, and Kinder Morgan to construct sufficient NGL pipelines to take advantage of this $176 billion megatrend.
The sum total of its expansion efforts is that MarkWest is guiding for 30+% growth in distributable cash flow this year, with distribution growth of 7% in 2014, 10% in 2015, and accelerating in years to come. 

Foolish takeaway
America's energy boom is a multi-generational affair that will enrich investors in MLPs such as Magellan Midstream Partners and MarkWest Energy Partners for decades to come. Long-term income investors are likely to do exceptionally well owning both, though Magellan Midstream Partners should be dollar-cost averaged due to its high valuation. 

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2014, at 12:42 PM, ThomasOil wrote:

    How can the author come up with 62% (and 67% for total growth) projected earnings growth for MWE while in the article it says 30+% growth for 2014, and even less for distribution growth for 2014 and 2015?

  • Report this Comment On July 16, 2014, at 5:09 PM, AdamGalas wrote:

    Thank you for clarifying the confusion.

    30+% is DCF guidance for 2014. The growth rates listed in the table are compound annual growth rates through 2023.

  • Report this Comment On July 17, 2014, at 10:58 AM, ThomasOil wrote:

    Thank you for explanation. Indeed MWE has a great growth plan.

    While MWE has a great growth plan, its current valuation is also staggering. PE is 190, even next year PE is 46, and current PEG is 11 (which means extremely overvalued), Thus MWE may be overbought at this time as most anticipated gain has been built into the current price.

    Compare with other favorite stocks such as BBEP (PEG 1.9), OILT (PEG 2), HCLP (PEG 0.98), EMES (PEG 0.95). Thus, HCLP and EMES need to go up 1,000% to get the same valuation as MWE with respect to PEG.

    Maybe we should wait when there is a pullback to buy MWE?

  • Report this Comment On July 18, 2014, at 9:10 PM, AdamGalas wrote:

    ThomasOil, two thoughts.

    First, MWE has certainly had a hot run and I'd certainly advise not buying all in at once. If you are interested try buying in thirds, ie dollar cost averaging.

    Second, with MLPs, capital intensive securities with vast amounts of tax write offs, earnings per share are largely meaningless.

    EBITDA: earnings before interest, taxes, depreciation and amortization is a calculation of cash flows minus the cost of running the business.

    This is a much better metric for valuing MLPs.

    To judge valuation I like Enterprise Value/EBITDA.

    Enterprise value is the cost of buying the business: market cap+debt-cash

    EV/EBITDA is a great way to compare MLPs in the same sector, like midstream or upstream.

    MarkWest's EV/EBITDA is 23.95, while the average for midstream MLPs is 20.

    So MarkWest is 20% more expensive than the average midstream MLP.

    Now keep in mind the range of EV/EBITDA in this industry is between 6 and 78, so that average is a very rough guide.

    Some famous midstreams to compare to are:

    KMP: 11.97

    BWP: 10.87

    EPB: 11.15

    Non general partner MLPs

    EPD: 19.19

    BPL: 21.08

    MMP: 22.81

    MWE: 23.95

    GEL: 34.35

    So MarkWest is certainly higher valued than most MLPs, even those without general partners. No general partner means lower cost of capital and faster distribution growth, thus they command a premium to MLPs with general partners, like Kinder Morgan.

    BUT with a yield of 5% and a distribution that is likely to grow at an accelerating rate over the next decade, you really can't lose with MarkWest.

    Think about it. You buy 1/3rd today. 5% yield, locked in.

    The price drops 20%, yield is now 5.9%. You buy your second third.

    The price drops another 20%, nasty correction here: 7.4% yield.

    All the while you reinvest your distributions at better prices.

    Or the economic recovery accelerates and MWE soars 20%, how sad are you about that? Your yield is still locked in, 5% no matter what the price. PLUS you have 7% distribution growth this year, 10% next year, say 13% after that. Within 3 years your yield on invested capital is 6.9%.

    That's why I love high-quality high yielding MLPs.

    Rule of thumb is yield+distribution growth=total return.

    Market 1873-2013 compound annual growth rate, including dividends is 9.2%.

    So find something with yield+distribution growth of greater than 10 and you beat the market.

    In the MLP space that is pretty much everything.

    Kinder Morgan? 12% expected total returns (13.4% with distribution reinvestment),

    MarkWest? Well, just see how well investors have done with MMP over the years. 27% compounded annual total returns over the last 12 years. With distribution reinvestment closer to 30%.

  • Report this Comment On July 18, 2014, at 9:13 PM, AdamGalas wrote:

    Be careful not to use PE ratios for MLPs. EBITDA is better and PEG ratios in general need to be taken with a grain of salt.

    A PE of 50 with 100% projected 5 year growth has a PEG of .5, so seems cheap. But if growth comes in at 33%, then the stock price will collapse. That's why yield is important.

    With MWE, 5% yield, even if this is a top, you're still being paid well to wait and buy more cheaper.

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Adam Galas

Adam Galas is an energy writer for The Motley Fool and a retired Army Medical Services Officer. After serving his country in the global war on terror, he has come home to serve investors by teaching them how to invest better in order to achieve their financial dreams.

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Related Tickers

8/28/2015 4:04 PM
MMP $71.94 Up +0.75 +1.05%
Magellan Midstream… CAPS Rating: *****
MWE $56.96 Up +0.18 +0.32%
MarkWest Energy Pa… CAPS Rating: ****