Note: This article has been amended to correct Enterprise Products Partners dividend yield.
A 0% interest rate environment has created a crowd of hungry-for-yield investors. With rates so low, you have two options — either stash your money in CDs earning close to nothing, or invest in highly speculative investments. Well, now there’s also a third way: invest your money in financial vehicles called MLPs.
These partnerships will reward you with exceptionally high dividend payouts that you can count on. In fact, MLPs are required to pay out the majority of their income as dividends, similar to REITs. Although dividend yields have been historically much higher, the average MLP still boasts a healthy 5.7%. That’s almost three times as high as an average S&P 500 company.
The best of both worlds
Master Limited Partnerships (MLPs) are a form of corporate organization that carry the tax benefits of a partnership. Because MLPs do not have to pay corporate taxes, they have more cash available to fund their distributions and pay hefty dividends to their unit-holders. In particular, you can find many MLPs in the gas pipeline energy business. The energy revolution in the U.S hasn’t gone unnoticed, and these MLPs are trying to take advantage of it. With natural gas (NG) becoming so cheap, abundant, and popular (unlike “dirty” coal) — the stage is set for its revival.
And the great beneficiaries of this revival would be companies that are engaged in the NG industry. This means that today, you can enjoy both worlds — have an unlimited upside potential, and receive a healthy income stream from the dividends paid by MLPs.
The most successful candidates out there
I’ve listed below three superior MLPs. All three exhibit a conservative balance sheet – one with a reasonable amount of debt compared to cash, a proven ability to generate a consistent stream of cash flow, and most importantly – all three have a great growth potential.
ONEOK is more than just OK
Oneok Partners LP (NYSE:OKS) is the largest independent operator of natural gas gathering pipelines and processing plants in the Williston BasinThe company specializes in natural gas gathering and processing, natural gas pipelines, and natural gas liquids (NGLs).
It’s one of the biggest U.S. companies in all three businesses, with an enterprise value of $15.8 billion. Of the three, NGLs are Oneok Partners LP (NYSE:OKS)‘s biggest business and its biggest source of growth. NGLs were less than 20% of Oneok Partners LP (NYSE:OKS)‘s business in 2006. Today, they are more than 60%, and still the fastest-growing part.
Oneok Partners LP (NYSE:OKS) just completed its $600 million, 600-mile,12-inch Bakken NGL pipeline in April. It’s got an initial capacity of 60,000 barrels per day. Oneok Partners LP (NYSE:OKS) will invest $100 million on additional pumping stations to increase the pipeline’s capacity to 135,000 barrels per day.
This is the first pipeline ever to transport NGLs from the Williston Basin to key market centers in Conway, Kansas and to the Gulf Coast. That’s how this company is positioning itself to grab market share.
With long-term debt of $6.5 billion and annual cash flow from operations just shy of $1 billion, the company’s balance sheet is one of the most conservative ones in the industry. Oneok Partners LP (NYSE:OKS) is currently trading for less than nine times free cash flow. That’s really cheap, especially when you consider its 5.6% dividend yield.
A high-quality enterprise
Enterprise Products Partners L.P. (NYSE:EPD) is the largest publicly traded energy partnership in the U.S., with an enterprise value of more than $70 billion. It operates one of the largest pipeline networks in the country. Enterprise Products Partners L.P. (NYSE:EPD)‘ total estimated 2014 NGL fractionation capacity is 610,000 barrels per day. That’s 37.4% of the total fractionation capacity in the area – more than any other company.