Generate Income With These Top Distribution Payers

These three energy companies boast a greater than 6% annual distribution yield, and come with tax benefits

Jul 28, 2014 at 11:42AM

Energy companies are notorious for enticing investors with high dividend yields, but even for the sector these three companies' dividend payout is impressive. Even better, these stocks benefit income investors because they come with a tax break compared to regular corporations. That is because all the companies mentioned here are partnerships.

Investors in MLPs only pay taxes on distributions after they receive them, preventing shareholders from being double taxed. Further reducing shareholders' tax burden, MLPs can "write-off" losses and large capital expenditures and pass these benefits onto their shareholders.

1. Williams Partners L.P. Annual distribution yield: 6.75%

 Williams Partners' 6.75% annual distribution yield is the lowest of the three companies mentioned here, but the company just increased its quarterly distribution by 1.33%. Williams Partners has consistently increased its distribution rate since it started paying them back in 2005.

Williams Partners is engaged in the transport, processing, and storage of natural gas, as well as oil transport. Williams Partners interstate pipelines deliver 14% of the natural gas consumed in the U.S. While the company is enticing investors with a large distribution, over the past two years it has experienced a decline in revenue and earnings.

2. BreitBurn Energy Partners L.P. Annual distribution yield: 8.82%

BreitBurn Energy Partners is focused on the acquisition, exploitation and development of oil and gas properties in the United States. BreitBurn's Q2 distribution payout has been set at $0.503 per unit, and the company has consistently increased its distribution since 2010. 

Breitburn's strategy has been to focus on liquids, which the company sees as offering a better return to shareholders and providing the cash to fund its large distributions. The company has been pursuing this strategy in part through acquisitions. On July 24 Breitburn announced that it had signed a merger agreement to acquire QRE Energy in a unit-for-unit exchange for a total value of approximately $3 billion. Through the acquisition Breitburn will become the largest oil-weighted MLP.  According to BBEP, after acquiring QRE the combined company will produce approximately 57,300 barrels of oil equivalent per day, 67% of which will be liquids. Currently, Breitburn's production is 61% liquids.

Another plus for investors, Breitburn expects the deal to be accretive to its distributable cash flow per unit, and Breitburn will recommend its board raise its annual distribution to $2.08 per unit from $1.95 per unit. The deal is expected to close by early 2015.

3. LINN Energy LLC: Annual distribution yield 9.27%

LINN Energy acquires and develops natural gas and oil assets. The company currently pays a monthly distribution of $0.246 per unit, making the annual distribution yield 9.27%. The company slashed its dividend in 2013; the prior dividend was $0.725 per unit. The distribution was reduced last year as the company's stock slid following the filing of a class action suit by investors alleging LINN Energy was fraudulent in the way it accounted for distributable cash flow. An informal SEC inquiry was also launched, which found no wrongdoing. Just a few weeks ago, on July 9 the US District Court announced that it had dismissed the class action suit. The dismissal of the suit removes a dark cloud that has been lingering over LINN for about a year, and positions the stock to gain some positive momentum. 

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Leia Klingel has no position in any stocks mentioned. The Motley Fool recommends BreitBurn Energy Partners. 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.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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