Source: Plains All American Pipeline.

The worst oil crash in nearly 50 years has resulted in a treacherous minefield for dividend investors. On one hand, high-quality midstream MLPs such as Enterprise Products Partners (EPD -1.86%) are trading at their lowest levels since the financial crisis. However, the market has also mercilessly beaten down riskier pipeline operators such as Plains All American Pipeline (PAA -1.35%) and its general partner, Plains GP Holdings (PAGP -1.49%).

PAA Chart
PAA data by YCharts

Is it worth taking on the additional risk for the greater discount? Let's compare these high-yield MLPs to figure out the three best ways to separate the wheat from the chaff during this crude crash.

Valuation is just the first step

MLPForward Yield 5-Year Average Yield Price/Operating Cash Flow 5-Year Average Price/Operating Cash Flow 
Plains All American Pipeline 13.7% 5.4% 4.7 7.7
Plains GP Holdings 11.7% NA 1.8 37.3
Enterprise Products Partners 6.9% 4.7% 11.6 15.2

Sources: Yahoo! Finance, Fastgraphs.

Valuation, especially forward yield, is usually the first thing that attracts the attention of income investors. Plains All American is currently trading at a huge discount to its historical valuations, and is seemingly much cheaper than Enterprise Products Partners.

However, yields over 10% can also be signs of distress anytime, and so extra caution is warranted. That's because a sky-high yield can be a warning sign that a distribution cut may be imminent.

Payout sustainability: the most important thing to consider

MLP Q1-Q3 2015 DCR Q1-Q3 2015 Excess DCF (Annualized and Excluding Asset Sales) 
Plains All American Pipeline 0.88 ($174 million)
Plains GP Holdings 1.01 $1 million 
Enterprise Products Partners 1.3 $1.0 billion 

Sources: earnings releases, earnings presentations.

Note that Plains GP Holdings derives its cash flow from distributions and incentive distribution rights from Plains All American Pipeline and has a policy of paying out all its distributable cash flow (DCF) to investors, thus explaining the coverage ratio of 1.01. Enterprise's figures represent full 2015 results.

However, the sustainability of its distribution is dependent on whether Plains All American Pipeline can maintain its own payout. With a coverage ratio of 0.88 in the first nine months of 2015, the security of that MLP's payout is gravely in doubt.

On the flip side, Enterprise Products Partners' river of excess cash flow means that the current payout sustainable and capable of supporting moderate growth. In fact, Enterprise's management recently issued payout guidance of 5.2% growth for 2016. It's high amount of retained cash should also go a long way in funding its $6.7 billion in capital projects currently under construction.

Access to growth capital: the final piece of the puzzle

MLP Leverage Ratio Average Debt Cost WACC ROIC 
Plains All American Pipeline  5.3 3.8%  7.42% 7.07%
Plains GP Holdings 5.5 3.7% NA  9.99% 
Enterprise Products Partners 4.3 4.4% 7.85% 8.51% 

Sources: Morningstar, GuruFocus.

Access to capital is the lifeblood of MLPs, and this is another realm where Enterprise shines. Plains All American's more highly leveraged balance sheet puts it in a difficult position. It's unlikely to be able to continue borrowing so cheaply, and its ultra-low unit price means regular equity growth capital is uneconomical. Until oil prices recover enough to reopen Plains All American's access to equity markets it will need to turn to more expensive funding sources such as the $1.5 billion in 8% preferred convertible units it just issued.

However, this more expensive funding means its weighted average cost of capital (WACC) is likely to rise. Since the Plain's WACC is already higher than its return on invested capital, management may be forced to cut the dividend and use internal cash flows to fund growth.

Enterprise, on the other hand, can fund much of its growth internally, making it far less dependent on debt and equity markets. As a result, its new projects typically lead to more cash flow per unit.

Bottom line
With equity markets panicking and debt growth capital potentially drying up or at least becoming more expensive in the coming few years, the strength of a pipeline operator's business model becomes abundantly clear when one examines its distribution coverage ratio, balance sheet strength, and ability to fund future growth through retained cash flow.

These metrics are great proxies for sustainable long-term distribution growth as well as quality, conservative management that has its eyes on the long-term prize. By avoiding high-yield traps like Plains All American and instead investing in Enterprise Products Partners, income investors could avoid painful distribution cuts and potentially come out of the oil crash richly rewarded, whenever crude finally recovers.