Higher yields don't always have to be higher risk. Sometimes companies have to pay well above average dividends to meet a government requirement. That's the case with master limited partnerships (MLPs), as they need to distribute most of their net income to maintain their special tax-advantaged status with the IRS.
Three top-flight high-yielding MLPs are Enterprise Products Partners (EPD 0.45%), Magellan Midstream Partners (MMP +0.00%), and Plains All American Pipeline (PAA 0.57%). Here's why investors might want to consider one of these attractive income stocks.
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20 years of distribution increases
Enterprise Products Partners currently yields an enticing 6.1%. The company supports that payout with strong financial metrics. The foundation is its stable and predictable cash flow. Overall, long-term, fee-based contracts lock in roughly 85% of its annual earnings. Meanwhile, Enterprise only distributes about 60% of those funds to investors in support of its high-yielding dividend. Finally, the company has one of the strongest balance sheets in the sector.
Thanks to its strong financial foundation, Enterprise has the flexibility to invest in projects that expand its midstream empire. That has enabled it to grow its cash flow, which has allowed it to steadily increase its distribution to investors. Enterprise has already given its investors a raise for 20 straight years, including boosting its payout in each of the last 60 consecutive quarters. That trend should continue in the coming years since the company has $6 billion of expansion projects under construction and another $5 billion to $10 billion in development.
69 and counting
Magellan Midstream Partners also currently yields an attractive 6.1%. That payout, likewise, is on a firm foundation thanks to the company's solid financial metrics. That's because Magellan also produces stable and predictable cash flow backed by long-term contracts, which currently supply more than 85% of its earnings. While the company does pay out about 80% of its cash flow, it expects to retain about $300 million in cash this year after paying its distribution to help fund expansion projects. Add that to its sector-leading balance sheet, and it has plenty of financial flexibility to grow its business.
Magellan currently expects to invest $1.25 billion over the next two years to expand its platform. That should give it the funds to increase its payout by another 5% this year, with further growth likely in 2020. As a result, the MLP will continue the trend of raising its distribution, which it has now done 69 times since its initial public offering in 2001.
Plenty of fuel to continue growing
Plains All American Pipeline currently offers the highest yield of this trio at 6.6%. Like its peers, Plains All American boasts solid financial metrics, which enhance the long-term sustainability of its payout. While the company only gets about 80% of its earnings from stable and predictable free-based contracts, it pays out less than 50% of those funds in support of the distribution. Meanwhile, it has an investment-grade balance sheet backed by leverage metrics that are below its target range.
That gives the company the financial flexibility to expand its oil pipeline infrastructure. Plains All American currently expects to invest $1.5 billion on projects this year, including five new ones that it recently approved. Because of that, the company believes it can grow its payout by around a 5% annual rate over the next few years.
High yields and healthy growth prospects
Yield-seeking investors will like that this trio of top-tier MLPs all currently pay more than 5%. Even better, those payouts are on a sustainable footing, given their strong financial metrics. Meanwhile, they add to that attraction by boasting visible growth prospects. That means income-focused investors will be able to collect a steadily rising income stream in the coming years.
