These Super Cheap Dividend Stocks Can Supercharge Your Income

Master limited partnerships (MLPs) have fallen out of favor with investors in recent years. Changes in the tax code have made these more complex entities not worth the hassle for some investors, and their valuations have fallen relative to traditional corporations operating similar businesses.

However, for investors willing to take on the additional challenges of investing in MLPs, they're great ways to jolt your income production because they offer much higher yields. Three great options to consider are Brookfield Infrastructure Partners (BIP -1.33%), Crestwood Equity Partners (CEQP), and Energy Transfer (ET 0.44%).

A head-scratching discount

Brookfield Infrastructure Partners trades at a much lower price than its corporate twin Brookfield Infrastructure Corporation (BIPC -0.47%), even though they're economically equivalent entities. The partnership units currently trade at less than $33 apiece, while the corporate shares sell for around $43.50. Because both entities pay the same distribution/dividend rate of $0.3825 per unit/share each quarter, the partnership has a much higher yield at 4.7%, versus 3.5% for the corporate shares. 

That lower unit price gives it a much cheaper valuation. Brookfield Infrastructure expects to generate more than $3 per unit/share of funds from operations (FFO) this year. That puts the partnership's valuation at 11 times FFO, while the corporate shares trade at 14.5 times that same metric. While both are cheaper than the broader market -- the S&P 500 trades at 17.3 times its forward earnings -- Brookfield Infrastructure Partners is exceptionally cheap.

There's no reason for this discounted price. Brookfield Infrastructure is growing briskly -- FFO per unit/share was up 12% last year and is tracking to increase another 12% to 15% in 2023 -- and should sell for a premium valuation, not a discount to the broader market. Now's a great time to pick up units at a bargain price and higher yield.

Bottom-of-the-barrel valuations

Midstream MLPs Crestwood Equity Partners and Energy Transfer trade at much lower valuations compared to other pipeline stocks:  

Data source: Company investor relations presentations.

That discount comes even though Crestwood Equity and Energy Transfer operate the same types of assets. They also have similar financial profiles and credit metrics. All five midstream companies generate enough free cash flow to cover their distribution/dividend payments by at least 1.6 times. In addition, they have comfortable leverage ratios of 4.5 times debt-to-EBTIDA or less. These factors leave no reason for the valuation disconnect.

Because they're cheaper, investors can lock in higher yields. Crestwood's distribution yields more than 10%, while Energy Transfer's payout clocks in at around 9.5%. For comparison, the dividend yields of Enbridge, Kinder Morgan, and Williams range between 6% and 7%. Those higher-yielding payouts are on equally firm foundations. All five midstream companies expect to generate the free cash flow to cover their capital returns to investors with enough room to spare to fund most of their expansion programs. That will enable each to maintain solid credit metrics.

Worth the extra work

Publicly traded partnerships are out of favor these days, meaning investors can buy them at much lower valuations than a similar corporation, with the potential to lock in higher yields. While there's some more paperwork at tax time, and you can't hold an MLP in a tax-advantaged account like an IRA, the additional effort can be worth the extra income boost.