Master limited partnerships (MLPs) can be phenomenal passive-income investments. They typically generate stable cash flow, most of which they distribute to their investors. Because of that, they often offer very high dividend yields.
Crestwood Equity Partners (CEQP) and MPLX (MPLX 0.17%) stand out among MLPs for their big-time payouts. With yields over 9%, they can put a charge in your passive income.
Crestwood Equity Partners: On an increasingly firm foundation
Crestwood Equity Partners currently yields 9.9%. At that rate, the midstream company can turn a $1,000 investment into nearly $100 of annual passive income.
While a payout approaching double digits is often a cause for concern, that's not the case with this MLP. Crestwood has a rock-solid financial foundation that's getting stronger each quarter.
It expects to produce $430 million to $510 million of distributable cash flow this year. That's enough to cover its distribution by a comfy 1.6 to 1.8 multiple, enabling it to retain enough cash for its planned capital spending ($135 million to $155 million) with room to spare ($10 million to $90 million).
The growth capital will enable it to connect more wells to its existing infrastructure, helping increase utilization and cash flow.
The company plans to use its excess free cash flow to strengthen its already solid balance sheet. Crestwood ended the first quarter with a 4.2 times leverage ratio. That fell to 4 following the recent sale of its joint-venture interest in Tres Palacios natural gas storage, and it should continue declining.
The company plans to use excess free cash flow to reduce debt, which, along with earnings growth, should steadily drive leverage down toward its long-term target of less than 3.5 times.
Achieving that target would give the company more flexibility to enhance value for its investors. It could continue executing its consolidation strategy, increase its already sizable distribution, and repurchase some common and preferred units.
MPLX: The upward trend should continue
MPLX currently yields 9%. That would turn a $1,000 investment into around $90 of passive income annually.
The MLP generated nearly $1.7 billion of distributable cash flow during the first quarter, enough to cover its big-time payout by a comfy 1.6 times. That enabled it to retain cash to help fund expansion projects and fortify its already strong balance sheet. Its leverage ratio was down to 3.5 times at the end of the first quarter, well below its 4 target.
MPLX is investing to expand its pipelines in the Permian and Bakken basins. It's also building additional natural gas processing plants in the Permian and Marcellus basins. These projects should come on line through the first half of next year, helping to grow its cash flow, providing more investor returns.
The MLP has an excellent track record of increasing its distribution. It gave investors a 10% raise late last year and has distributed more cash to investors every year since its formation in 2012. MPLX also returns excess free cash to investors by repurchasing its units. With upcoming expansion projects boosting its cash flow, distributions should keep rising.
Enticing income-producing investments
MPLX and Crestwood Equity Partners are backed by rock-solid financials. That gives them the flexibility to keep expanding, thus increasing their cash flow, and further enhancing their high-yielding distributions. This cycle makes them attractive to those seeking to charge up their passive income.
