Dividend-paying stocks can be great wealth-building tools. But some high-yielding companies are just too risky for the average investor to own, and it's especially true of companies that lack diversity as they typically produce uneven income streams to investors. In fact, I've found three high-yielding companies that I think investors looking for income certainty and security should simply avoid.
Not refined enough for me
Northern Tier Energy (UNKNOWN:NTI.DL) owns one refinery in St. Paul Park, Minn., along with more than 150 retail-convenience stores. It's a solid company with good long-term prospects. But because the whole business is basically built on one major asset, Northern Tier Energy is just a bit too risky for my tastes as I'd prefer to invest in a much more diversified venture.
Because the company's primary asset is one refinery, the income it distributes to investors is almost completely reliant on how well that asset performs from quarter to quarter. Lately, performance hasn't been that great as margins at that refinery have come down. Because of that the company's distribution to investors dropped from $1.48 per unit to just $0.31 per unit over the past year. As a variable distribution master limited partnership, Northern Tier Energy's investors have felt the full force of the headwinds the company has faced over the past year. While those headwinds could reverse in 2014, there are better companies to invest in for a steadier payout, which is why I'd avoid Northern Tier Energy in 2014.
World class income when it's producing
Like Northern Tier Energy, PetroLogistics' (UNKNOWN:UNKNOWN) business is built on one main asset. In this case PetroLogistics owns and operates the world's largest propane dehydrogenation plant, which is located near the Houston Ship Channel. As great as that asset is, when it's experiencing a temporary outage investors aren't making money. Over the past year outages have caused production to temporarily cease, which also caused the distribution to investors to be as low as $0.21 per unit, which is well off the high of $0.67 per unit.
While PetroLogistics owns a great asset, and one that's currently producing a double-digit yield, it has also produced a lot of volatility in both its units and the payout. Investors seeking security need to look elsewhere. One option is Enterprise Products Partners (NYSE:EPD), which is building its own world scale propane dehydrogenation plant. The difference here is that Enterprise Products Partners owns a well-diversified set of operations that include a propane export terminal, dozens of processing plants, and thousands of miles of pipelines. These assets have enabled Enterprise Products Partners to grow its distribution to investors for 37 straight quarters. That's why I'd avoid PetroLogistics' massive distribution and go with a safe and steadily growing payout like the one from Enterprise Products Partners.
Continuing our theme of one-asset wonders is Terra Nitrogen (NYSE:TNH), which owns a nitrogen-manufacturing facility in Oklahoma. That one asset produces nitrogen fertilizer from natural gas. It also produces a variable payout to investors that has ranged between $4.68 and $2.02 this year.
This past quarter Terra Nitrogen's margins were hurt as realized natural-gas prices increased by 10%. Because the company has direct exposure to commodity prices, it can negatively impact its distribution to investors. Most other MLPs shy away from having exposure to commodity prices either through hedging or through fee-based contracts.
Using Enterprise Product Partners again as an example, one of the reasons its payout is so steady is because 81% of its gross-operating margin is supported by fee-based activities. The addition of the broad diversity of its revenue streams makes its distribution to investors even safer. Terra Nitrogen's distribution, on the other hand, can be affected by anything from natural-gas prices to the cyclical natural of its business, which is why I'd avoid it in 2014.
All three companies could end up rewarding investors over the long term. But investors are taking on more risk to receive that reward. There are a number of much safer income paying stocks out there that might yield a bit less, but at the same time are much less risky. So, for investors seeking safety, these are three income stocks that I'd suggest are better off being avoided.
Fool contributor Matt DiLallo owns shares of Enterprise Products Partners L.P.. The Motley Fool recommends Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.