Please ensure Javascript is enabled for purposes of website accessibility

There Are Huge Dividends in These Master Limited Partnerships

By Selena Maranjian – Sep 16, 2013 at 7:16PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How does a 9.5% dividend yield sound?

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some master limited partnership, or MLP, stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Global X MLP ETF (MLPA 1.18%) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Global X ETF's management fee of 0.45% is lower than many of its peers' fees, but the actual cost to shareholders can be far higher due to taxes. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed reasonably, but it's also very young, with just a few years on the books. It underperformed the S&P 500 in 2008 and 2010, though it beat it substantially in 2007 and 2009. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why MLPs?
Master limited partnerships are appealing because they tend to pay out hefty dividends, but they also require different tax treatment. Note that MLP-focused ETFs can underperform their components because of tax complications, so you might consider selecting MLPs from within them instead of investing in the ETFs themselves.

More than a handful of MLPs had strong performances over the past year. Suburban Propane Partners (SPH -0.73%), recently yielding 7.7%, jumped 29%. The company got bigger last year by buying the propane business of Inergy (CEQP 2.04%), which doubles its customer base and moves it into 17 additional states. But despite ongoing revenue growth, it has posted some disappointing results in recent quarters, not growing as rapidly as expected -- and was downgraded by analysts at Zacks to "strong sell" in late August. The company recently issued more shares to pay down debt.

Targa Resources Partners (NYSE: NGLS) gained 27%, and yields 5.8%. It's a major natural gas liquids (NGL) player and has been hiking its payout significantly. Bears don't like that its distributable cash flow doesn't quite cover its actual distributions, but that can change. Its second quarter was solid, with management noting, "We saw higher volumes across all of our Field Gathering & Processing systems as a result of the continued increase in producer activity in the Permian Basin, North Texas and the Bakken." It has been investing in further organic growth, to the tune of about $1.7 billion.

Other companies didn't do quite as well over the last year but could see their fortunes change in the coming years. Inergy, recently yielding 3.9%, advanced 7%. Having shed its retail propane business to focus more on natural-gas storage and pipelines, it's planning to merge with Crestwood Midstream Partners, to oversee an even larger network of energy transportation and storage assets. 

PVR Partners (NYSE: PVR) stayed about even over the past year, and offers a whopping 9.5% yield. Like Targa, its distributable cash flow also didn't cover distributions recently. The company has been transforming itself from a coal royalty business into a natural-gas infrastructure one, but the transformation has been a bit bumpy. Bulls expect more pipelines to come to life for the company, and for its performance to improve. The company swallowed its general partner in 2011, and that gives it a lower cost of capital.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Longtime Fool contributor Selena Maranjianwhom you can follow on Twitter, holds no position in any stocks mentioned. Nor does The Motley Fool. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Global X MLP ETF Stock Quote
Global X MLP ETF
MLPA
$42.80 (1.18%) $0.50
Crestwood Equity Partners LP Stock Quote
Crestwood Equity Partners LP
CEQP
$28.98 (2.04%) $0.58
Suburban Propane Partners Stock Quote
Suburban Propane Partners
SPH
$16.20 (-0.73%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
351%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.