Master limited partnerships (MLPs) have fallen out of favor with investors over the years because of their tax complexities. Instead of sending a 1099-DIV for tax purposes, MLPs send their investors a Schedule K-1, which typically arrives late in the tax filing season.
However, the extra work when filing taxes (and potential delays) can be well worth it, because many MLPs offer high-yielding distributions. Crestwood Equity Partners (CEQP +0.00%), Energy Transfer (ET 1.15%), and MPLX (MPLX 2.16%) all currently yield around 9%. That can turn a $1,000 investment into roughly $90 of annual passive income. In addition, all three MLPs recently declared their next distribution payment, setting investors up to start collecting income as early as next month.
Growing stronger by the quarter
Crestwood Equity Partners declared its latest quarterly distribution at $0.655 per unit ($2.62 annually) in late July. That gives the MLP a 9.1% yield at its current unit price. The company expects to make that payment to investors on Aug. 14 for those who hold units by Aug. 7.
NYSE: CEQP
Key Data Points
Crestwood's big-time payout is on an increasingly firm foundation. The MLP generates relatively stable cash flow because fixed-fee and take-or-pay contracts support 85% of its earnings. That gives it lots of visibility into its cash flow. Crestwood expects to produce between $430 million and $510 million of distributable cash flow this year, covering its distribution by a comfortable 1.6 to 1.8 times this year. That will allow it to retain enough money to fund its growth capital projects ($135 million to $155 million) with as much as $90 million to spare.
The MLP's excess free cash will enable it to strengthen its already solid balance sheet. Crestwood ended April with a 4.0 times leverage ratio. Its long-term goal is to get that number below 3.5 times to further enhance its financial flexibility. It could use some of that flexibility to increase its already big-time distribution in the future.
More growth ahead
Energy Transfer announced its latest distribution in late July. The midstream MLP will pay $0.31 per unit ($1.24 annualized), a $0.0025-per-unit increase from the prior payment. That gives it a 9.4% yield at the recent unit price. The company expects to make that payment to investors on Aug. 21 for those who hold units by Aug. 14.
NYSE: ET
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The company plans to make ongoing quarterly payment increases at that same rate in the future, implying roughly 3% to 5% annual growth. It has plenty of fuel to deliver on that plan.
Energy Transfer generated $2 billion in distributable cash flow in the first quarter, enough to cover its distribution with $965 million to spare. That enabled it to retain cash to fund expansion projects ($407 million in the quarter) and strengthen its already solid balance sheet. The company's excess free cash drives its view that leverage will be at the low end of its 4.0 to 4.5 times target range in the future.
The MLP recently used some of its financial flexibility to acquire Lotus Midstream in a roughly $1.5 billion deal, which will increase its distributable and free cash flow. Future acquisitions and expansion projects will grow its cash flow, giving it more fuel to deliver on its distribution growth strategy.
The upward trend should continue
MPLX announced its last distribution payment in late July, setting it at $0.775 per unit ($3.10 annualized). That gives the MLP an 8.7% yield at the recent unit price. The company expects to make that payment to investors on Aug. 14 for those who hold units by Aug. 4.
NYSE: MPLX
Key Data Points
The pipeline company can easily fund that big-time payout. It generated enough cash to cover its distribution by 1.6 times in the first quarter. Meanwhile, it has a low leverage ratio of 3.5 times, below its 4.0 times target.
MPLX uses its excess free cash to invest in expansion projects and opportunistically repurchase units. While it didn't complete any buybacks in the first quarter, it spent $491 million on repurchases last year. Meanwhile, it invested capital in expanding its natural gas long-haul and crude oil gathering pipelines in the Permian and Bakken basins. It's also increasing its natural gas processing capacity in the Permian and Marcellus basins.
Those expansion projects will supply the MLP with incremental cash flow when they come online over the next year. That will give it more fuel to increase its distribution. It gave investors a 10% raise last year and has grown its payout each year since its formation more than a decade ago.
Big-time passive-income producers
Crestwood Equity Partners, Energy Transfer, and MLPX currently offer distribution yields of around 9%. Those high yields are mainly because many investors don't want to deal with the tax hassles of investing in MLPs, given that the trio produces lots of steady cash flow. Add in their solid financial profiles and growth prospects, and these MLPs are great ways to supercharge your passive income production.
