It’s a good strategy to invest in income growth companies, sit back, and reap the rewards. But to beat inflation, investing in high yielding, yet stable companies is important. And this is exactly where companies with an MLP (Master Liability Partnerships) status roll in.
MLPs are generally oil and gas companies that generate consistent cash flows. They distribute the bulk of their cash generated and don’t have to pay corporate taxes. In turn, unit holders are liable to pay taxes on their distributed earnings. However, even after deducting taxes, certain companies yield greater returns than many of the highest yielding dividend income stocks.
An Income Stock
Enbridge Energy Partners, L.P. (NYSE:EEP) sports a hefty yield of 7.31% with a payout ratio of 293.22%. The company has just $241.5 million in cash and cash equivalents, which is certainly not enough to cover its annual cash distribution of $682 million. However, Enbridge Energy Partners, L.P. (NYSE:EEP) generated $799.4 million in operating cash flows (TTM), which can comfortably sustain its distribution payout (distribution coverage ratio of 1.17x).
The problem with having a low distribution coverage ratio is that companies aren’t left with enough cash for expansive activities. But Enbridge Energy Partners, L.P. (NYSE:EEP) is a mature operator with over 6,500 miles of oil pipelines, and over 11,500 miles of natural gas pipelines. With such an extensive reach, its financial performance is largely dependent on organic growth.
However, Enbridge Energy Partners, L.P. (NYSE:EEP) has planned a 600 mile-long pipeline project that would connect North Dakota Bakken oil fields to its Superior facility. The overall project cost is estimated to be around $2.5 billion, which would most likely be financed by debt. But Enbridge Energy Partners, L.P. (NYSE:EEP) is already highly leveraged, with a debt/equity ratio of 137%.
However, due to FERC’s rejection, the project timeline has been delayed by 2-3 years. Income investors can find solace in the news, as Enbridge Energy Partners, L.P. (NYSE:EEP) can now continue with its hefty distribution without straining its balance sheet (at least for the next couple of years).
A Growth Play
Amongst these companies, Enterprise Products Partners L.P. (NYSE:EPD) is the largest oil company with a huge market capitalization of around $56 billion. Contrary to the general belief that MLP’s deliver steady returns over time, its shares have risen by 31% over the last year. And to top it all off, its shares yield 4.5% with a relatively low payout ratio of 93.18%.