Master Limited Partnerships, or MLPs have been an increasingly popular stock sector in recent years thanks to their preferential tax treatment that results in a business model that pays out the majority of cash flow in the form of very generous high-yields.
However, as with most high-yield stocks on Wall Street, one needs to be extra careful because MLPs, like many industries, have their own risk factors to keep in mind.
In addition, investors need to carefully research any individual MLP to make sure that a sky-high yield doesn’t signal that a stock is a value trap (i.e. its business is in distress).
This brings me to America’s largest and most popular propane MLP, AmeriGas Partners, L.P. (NYSE:APU). This stock offers a mouthwatering 8.0% yield and represents arguably the highest quality name in its niche industry.
But before you run out and load up on units of this propane giant, be aware that some industries can be so precarious that even their best-in-breed names can’t represent safe high-yield income investments for long-term dividend investors.
Let’s take a look at AmeriGas Partners to see what kinds of risks and rewards it offers investors.
AmeriGas Partners is America’s largest distributor of propane, selling 1.5 billion gallons to 2.4 million customers in all 50 states.
The vast majority of its business is to residential (41% of retail gallons sold) and commercial (36%) clients who use propane to heat and provide backup power to their homes and businesses.
The general partner and manager is UGI Corporation (UGI), which is one of America’s largest distributors of propane and liquefied petroleum gas, or LPG.
Source: AmeriGas Partners Investor Presentation