HH The 10 Best MLPs For High Income

Master limited partnerships (or MLPs, for short) are some of the best investment vehicles for generating passive income. They are also one of the most misunderstood and under-appreciated types of securities on the market. Why is this? It is because the taxes that investors pay on MLP distributions are more complicated than the taxes paid on the dividends of traditional corporations. This does not mean that the taxes paid are higher.  In fact, MLPs are the most tax efficient vehicles for returning money to investors, largely because they avoid the double taxation (personal and corporate) of normal corporate dividends.  MLPs are not taxed at the organization level. The personal taxes paid on MLP distribution are structured differently as a result.

Typically, somewhere around 80% to 90% of MLP distributions are considered a ‘return of capital’ because of depreciation.  You don’t pay taxes immediately on ‘return of capital’ distributions. Instead, returns of capital reduce your cost basis in the MLP.  You are not taxed until you sell the units or your cost basis falls below zero. With all this in mind, MLPs are a very viable investment vehicle for retirees and other investors seeking to generate current portfolio income. Most MLPs have 5%+ dividend yields, making them a compelling investment for high income investors.

You can see the full list of 416 stocks with 5%+ dividend yields here. 

This article will list the 10 best MLPs for high income, listed in order of their rank according to The 8 Rules of Dividend Investing.

High Income MLP #10: Spectra Energy Partners (SEP)

Spectra Energy Partners is a Houston-based master limited partnership that operates more than 15,000 miles of transmission pipelines, approximately 170 billion cubic feet of natural gas storage, and approximately 5.6 million barrels of crude oil storage.

Until recently, Spectra Energy Partners was affiliated with Spectra Energy (SE), which owned the general partner of Spectra Energy Partners and also had a limited partner investment in the MLP.

Spectra Energy recently merged with Enbridge (ENB), a Canadian midstream energy company with a market capitalization of US$63 billion.

Because of this merger, Spectra Energy Partners is now a member of the Enbridge family of partnerships, which also includes Enbridge Income Fund Holdings (ENF) and Enbridge Energy Partners (EEP).

SEP Spectra Energy Partners Joint Financial Update Call

Source: Spectra Energy Partners First Quarter Earnings Presentation, slide 2

Spectra Energy Partners is somewhat of a fan favorite among its investor base because of its track record of outstanding total returns.

The partnership has increased its cash distribution for 38 consecutive quarters and has done so without compromising the safety of its dividend.

This security-level performance is driven by strong fundamental business execution.

Spectra owns high-quality assets with a primary concentration on natural gas pipelines, and is focused on exercising its ‘last mile’ competitive advantage – the advantage of owning midstream energy assets at or near the assets of associated energy exploration corporations.

SEP Spectra Energy Partners Investor Proposition

Source: Spectra Energy Partners First Quarter Earnings Presentation, slide 37

Some investors were concerned about the future of Spectra Energy Partners after its general partner (Spectra Energy) merged with Enbridge.

More specifically, there were rumors that Spectra Energy Partners would be fully absorbed by Enbridge and the associated assets would operate under the Enbridge name.

Enbridge has completed its post-merger strategic review and this outcome was not determined to be in the best interests of SEP shareholders. For the time being, Spectra Energy Partners will continue to operate as an independent entity with its general partner being a wholly-owned subsidiary of Enbridge.

And, the partnership has a strong dividend outlook for the year ahead period. Distributable cash flow guidance implies a distribution coverage ratio of 1.05x-1.15x for fiscal 2017, meaning that Spectra’s distribution is well-covered and this is some room to continue its streak of consecutive dividend increases (although near-term increases will likely be small).

SEP Spectra Energy Partners Ongoing Distrituable Cash Flow

Source: Spectra Energy Partners First Quarter Earnings Presentation, slide 33

Spectra Energy Partners is a very appealing investment from an income perspective. It has a dividend yield more than three times as high as the average dividend yield in the S&P 500.

The partnership currently pays a dividend of $0.70125 which yields 6.7% on the company’s current stock price of $41.61.

The following diagram compares its current dividend yield to the MLP’s long-term average.

SEP Spectra Energy Dividend Yield History

Source: YCharts

Spectra’s current dividend yield is 6.7% and its average dividend yield over the past decade is 5.4%.

Based on dividend yield alone, Spectra Energy Partners appears to be more than 20% undervalued. For more information on this MLP, you can read more Sure Dividend analysis at the following link:

High Income MLP #9: Holly Energy Partners (HEP)

Holly Energy Partners is a publicly-traded master limited partnership that operates a system of petroleum product and crude pipelines, storage tanks, distribution terminals, loading racks, and processing units.

The partnership’s assets are strategically positioned to be located at or near the assets of HollyFrontier Corporation (HFC). HollyFrontier owns the general partner of Holly Energy Partners (Holly Logistics Services LLC) and also has a 35% limited partnership interest.

The GP’s 35% LP interest is higher than normal for an MLP family. This is a shareholder-friendly arrangement that helps to align the interests of all parties involved.

HEP Holly Energy Partners Strategic Relationship With HollyFrontier

Source: Holly Energy Partners December Investor Presentation, slide 6

The economics of Holly Energy Partners’ business are attractive from a variety of standpoints.

Notably, the partnership’s revenues are contractual in nature and 100% fee-based. This helps to isolate the financial performance of Holly Energy Partners from fluctuations in the prices of its underlying commodities.

Holly Energy Partners has no contracts up for renewal until 2018 and more than 80% of the partnership’s revenues are tied to long-term contracts with minimum commitment levels.

These factors lead to favorable business stability. Holly Energy Partners has increased its quarterly dividend for 48 consecutive quarters since its initial public offering in 2004 (shown below).

HEP Holly Energy Partners Business Overview

Source: Holly Energy Partners December Investor Presentation, slide 3

Holly Energy Partners’ commendable performance is driven at the business level.

The partnership owns a high-quality, diversified base of assets spread across many geographies in the United States. As mentioned, HEP’s assets are strategically located near HFC’s operations, allowing the MLP and its GP to collaborate on projects that benefit both corporate entities.

Below, a map is shown highlighting the assets of both Holly Energy Partners and HollyFrontier.

HEP Holly Energy Partners Footprint of HollyFrontier and Holly Energy Partners

Source: Holly Energy Partners December Investor Presentation, slide 4

The collaboration between Holly Energy Partners and HollyFrontier extends beyond existing business operations.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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