NextEra Energy Partners (NYSE:NEP) and Phillips 66 Partners (NYSE:PSXP) both proudly proclaim themselves to be "growth-oriented" master limited partnerships. So far they have both done a pretty good job of living up to that, with distribution growth over the past three years of roughly 20% annualized at each. With that as a backdrop, Phillips 66 Partners' fat 6.1% yield is way higher than NextEra Energy Partners' 3.9% yield. But don't rush here -- there's an important nuance that might sway you toward the lower-yielding MLP.   

A regular old pipeline partnership

Phillips 66 Partners is controlled by Phillips 66 (NYSE:PSX). It owns a collection of domestic energy and refined product pipelines, processing facilities, and storage assets. It is a funding source for parent Phillips 66, which sells assets (called drop downs in the industry) to Phillips 66 Partners, freeing up cash that Phillips 66 can use to invest in new growth projects -- which could eventually get dropped down to the partnership, too. In addition to that, Phillips 66 Partners also invests in its own projects, like the roughly $1 billion worth of projects it is working on right now (with end dates through 2021). 

The word dividend in yellow with a jagged rising graph below it

Image source: Getty Images.

So far, this relationship has worked out pretty well for income-focused investors. Phillips 66 Partners has increased its distribution every single quarter since its initial public offering in 2013. There's no particular reason to expect the trend to stop, either, which recently led Fool.com contributor Matthew DiLallo to label the partnership a "great dividend stock." Key parts of that designation are the fee-based nature of Phillips 66 Partners' assets, which provide consistent revenue; its modest leverage (its debt-to-EBITDA ratio is roughly 3); and strong distribution coverage (roughly 1.3 times).   

The big difference from NextEra Energy Partners is Phillips 66 Partners' reliance on carbon-based energy. While volatile oil prices aren't that big a deal to the midstream partnership, long-term demand for oil and the various products into which it gets turned is rather important. Energy industry giants like Royal Dutch Shell are working hard to explain that the world will still need oil for years to come, but the long-term shift toward cleaner energy sources is already taking shape. Even Shell is hedging its bets and investing in the electricity space! So investors need to recognize that buying Phillips 66 Partners is a bet on carbon fuels.

A new direction

NextEra Energy Partners actually owns eight natural gas pipelines (and isn't shy about adding to its collection), so it isn't exactly carbon free. However, the bigger story is the roughly 5.3 gigawatts of renewable power it controls. Around 85% of that nameplate capacity is tied to wind, with the rest derived from solar facilities. The energy from these assets is sold under long-term contracts to end users, providing NextEra Energy Partners with a reliable income stream to support its distributions.   

NextEra Energy Partners is controlled by U.S. utility giant NextEra Energy (NYSE:NEE). It is basically a funding source, with NextEra Energy dropping assets down to NextEra Energy Partners to free up cash that the parent can put into future growth investments. Right now, NextEra Energy has plans to build up to 18.5 gigawatts of renewable power through 2022. A portion of that will get sold to its controlled partnership, helping to grow the business and its distributions. NextEra Energy Partners currently believes it will increase its disbursement at an annualized rate of 12% to 14% a year through 2022.    

That growth is basically being driven by the massive demand for renewable power in the United States. But that isn't a one- or two-year trend; NextEra Energy Partners believes renewable power generation will grow at a 15% compound annual rate through at least 2030. So buying NextEra Energy Partners is really a bet on the shift to renewable power. That's a story Wall Street really likes today, which is one of the reasons why the partnership's yield is lower than that of Phillips 66 Partners. And if you are focused on the environmental, social, and governance (ESG) investing approach, you'll probably find a lot to like at NextEra Energy Partners.   

PSXP Financial Debt to EBITDA (TTM) Chart

PSXP Financial Debt to EBITDA (TTM) data by YCharts.

The carbon issue, however, isn't the only difference here worth keeping in mind. NextEra Energy Partners' debt-to-EBITDA ratio is a hefty 7 times. That's more than twice the level at Phillips 66 Partners and notably higher than NextEra Energy Partners' parent. That's not to suggest that it can't handle the debt load it is carrying, but it also paid out almost all of its cash in the form of distributions (distribution coverage through the first nine months of the year was roughly 1 time). So NextEra Energy Partners offers a lower yield that is notably less secure, but underpinned by a compelling clean energy story.   

The better pick?

If you are a conservative investor, higher-yielding Phillips 66 Partners is probably the better option here. Not only will it provide you with a larger income stream, but lower leverage and stronger distribution coverage should help you sleep well at night -- assuming, of course, that you believe carbon-based fuels will remain important for years to come. If not, then you'll likely prefer NextEra Energy Partners. Although it doesn't avoid carbon fuels, its biggest growth opportunity is in solar and wind power. However, investors will need to get comfortable with a heavier debt load and tighter distribution coverage. If you can't get on board with that, then you may might want to avoid NextEra Energy Partners.