Master limited partnerships (MLPs) can be great for generating passive income. While these vehicles have more tax complications -- they issue a Schedule K-1 for tax purposes instead of the more familiar Form 1099 -- they must distribute 90% of their taxable income to investors to maintain their tax advantages. That means most MLPs offer ultra-high dividend yields.
Three MLPs that provide big-time yields that they should be able to sustain in the coming years are Crestwood Equity Partners (CEQP -1.78%), Energy Transfer (ET -1.78%), and Enterprise Products Partners (EPD -0.62%). That makes them great options for investors seeking to generate durable passive income.
Adding more fuel to the distribution growth engine
Crestwood Equity Partners currently offers a monster 8.6%-yielding distribution, light years ahead of the S&P 500's 1.4% dividend yield. While a payout that high might seem at high risk of a reduction, that's not the case at Crestwood. Instead, the company expects to increase its distribution by 5% this year.
The MLP can easily support that higher payment. It expects to generate enough cash to cover its distribution by 2.0 to 2.2 times this year. Meanwhile, even after funding $160 million to $180 million of expansion projects -- up from about $50 million last year -- Crestwood should generate $75 million to $135 million in excess cash. That will give it money to shore up its already solid balance sheet -- leverage is within its long-term target range -- and repurchase some of its equity.
Crestwood can grow its payout because it recently closed its acquisition of Oasis Midstream. That deal provided an immediate cash flow boost, along with future upside from expanse savings and expansion projects. It was the first big step in Crestwood's consolidation strategy, which could see it gobble up more MLPs. Those future deals, along with its organic expansion projects, would give it more fuel to keep growing its distribution in the future.
Getting back up to where it was
Energy Transfer's distribution currently clocks in at a 7.2% yield. That payout is also on track to head higher this year. Energy Transfer recently increased it by 15% to $0.175 per unit each quarter.
That's likely the first of several increases that investors can expect in the coming years. Energy Transfer set a goal to return its distribution to its prior level of $0.305 per unit each quarter in the future. It cut the payout from that level in 2020 to retain more cash to reduce debt.
This strategy has worked well. Energy Transfer paid off $6.3 billion in debt last year, putting its leverage ratio near its target range. That's giving it the flexibility to start returning more cash to investors. It could boost its payout to its former level right away because it generated enough cash to cover the current level by three times last quarter. However, the MLP wants to retain some financial flexibility in the near term to capture additional expansion projects. Those projects would give it even more fuel to grow its payout in the future.
As steady as they come
Enterprise Products Partners pays an 8%-yielding distribution. What stands out about the MLP's payout is its steady growth. Enterprise has increased its distribution for 23 straight years.
That upward trend seems likely to continue. For starters, Enterprise Products Partners has one of the highest quality financial profiles in the MLP space. It has excellent credit and a conservative distribution coverage ratio of 1.7 times.
That's giving it the financial flexibility to continue expanding. The MLP recently closed its $3.25 billion purchase of Navitas Midstream Partners, expanding its operations to the fast-growing Midland Basin. Meanwhile, it expects to invest $1.5 billion into expansion projects this year. These investments will help grow its cash flow, giving Enterprise more fuel to increase its distribution.
Fully fueled passive income streams
Crestwood Equity Partners, Energy Transfer, and Enterprise Products Partners generate lots of steady cash flow by operating energy midstream infrastructure. That gives them the funds to pay big-time distributions and invest in expanding their operations. Add in their strong financial profiles, and all three have the fuel to keep growing their already sizable payouts in the coming years. That makes them great options for investors seeking lucrative passive income streams.