What MLP Stocks Can Income Investors Count On?

While investors love the steady income that comes from owning a dividend stock, not all dividend stocks are created equally. Limited partnerships sport higher yields because they're legally obligated to pay out large percentages of their profits to shareholders, but they also come with different volatility profiles and additional paperwork come tax time. Can greater yields outweigh the added risks and trouble?

As with any investment, limited partnerships must be evaluated on a case-by-case basis. If you're looking for higher yields in the fertilizer industry, then you may want to evaluate nitrogen specialist limited partnerships Rentech Nitrogen Partners (NYSE: RNF) and CVR Partners (UAN 3.61%). Can either company be counted on for your income portfolio?

The potential rewards
The word "fertilizer" is actually a blanket term for several agricultural nutrients, which include the "Big Three" of nitrogen, potassium, and phosphorus. Nitrogen fertilizers represent approximately 62% of global fertilizer production, are a favorite among American corn farmers, and are the single largest determinant of crop yield. Producers also benefit from the fact that nitrogen fertilizers must be reapplied annually. An uptrend in global consumption doesn't hurt, either.

Source: CVR Partners.

When it comes to limited partnerships, investors reap the rewards when times are great and are reminded of the pitfalls when troubles arise or unaccounted events occur. Consider the current approximate yields of Rentech Nitrogen Partners and CVR Partners: 5.3% and 9% per share, respectively. It'll be difficult to find better returns than that. Better yet, if shares of both companies march higher from their current downturns and operations allow higher cash distributions in the next few years, then investors should have no problem capturing double-digit yields from today's share prices.

The rewards aren't the only thing to consider, however.

The potential pitfalls
Aside from additional tax paperwork, those giant quarterly distributions often fall victim to volatility caused by bad quarters, an unexpected outage or expense, or the simple ebb and flow of nitrogen-purchasing behavior. Consider the following table showing the past four distributions from Rentech Nitrogen Partners and CVR Partners compared to diversified fertilizer producer PotashCorp, which yields "only" 3.8%.

Source: Google Finance.

The volatility in the last four distributions at CVR Partners was hardly enough to give you heart palpitations, but as Rentech Nitrogen Partners demonstrates, things can get much worse. Unexpected downtime has compounded decreased selling prices in recent quarters. The volatility is also reflected in each company's total return price in the last three-year period.

UAN Total Return Price data by YCharts.

The takeaway: it's important to remember that the high yields you see on online financial dashboards aren't always what you get.

What company can you count on?
I used to own CVR Partners before trading in the shares to focus on my core area of expertise, so I'm likely biased to the company. However, I think the recent expansion project and a focus on diversification will allow the company to weather any short-term market downturns. Meanwhile, Rentech Nitrogen Partners has lost money in two of the last three quarters. The poor performance may be caused by maintenance issues, but the company simply hasn't offered the same stability as CVR Partners in the last three annual periods, either. If I were going to take on the added risks of owning a fertilizer limited partnership, I would choose CVR Partners. Just be aware of the added risks and paperwork.