Dividend investing is popular again. Investors have taken to heart Jeremy Siegel’s studies showing that higher-yielding stocks tend to offer greater returns over time than stocks that offer low or no yields do.
One particular area that has garnered interest over the years is master limited partnerships. Investors are drawn to MLPs for their high yields and tax deferment. MLPs don’t pay taxes at the corporate level, so the tax burden then gets passed to the investor. Without getting into too much detail, because of the structure of the partnerships and the distributions, investors are entitled to a serious tax deferral. Investors should fully understand what they are in for before buying MLPs, but for those willing to do the research, it can be very profitable.
The highest yields can be very tantalizing. As long as a stock yielding 15% doesn’t see its share price fall, you’ll make 15% in one year! In more cases than not, however, an astronomical yield is a bad sign for a stock. Since yields and stock prices move in opposite directions, a high yield usually means that investors have begun to worry about the business and driven down its stock price.
However, certain types of companies, such as MLPs, have to pay out most of their cash flow as distributions, so their yields will be higher than “normal.” Dividends are not guaranteed; you need to make sure that a business is generating enough cash to pay its dividend, or your investment could be disastrous.
I ran a screen for the highest-yielding MLPs. The only limitation I’ve set is that the MLPs must have a market cap greater than $1 billion.
Here are the top 25 highest-yielding MLPs the screen produced.
|Company Name||Market Cap (millions)||Dividend Yield|
|1||Northern Tier Energy LP (NYSE:NTI)||$2,887||16.20%|
|2||QR Energy LP (NYSE:QRE)||$1,018||11.20%|
|3||Natural Resource Partners LP (NYSE:NRP)||$2,428||9.95%|
|4||Ferrellgas Partners ||$1,619||9.77%|
|5||Breitburn Energy Partners ||$1,940||9.66%|
|6||PVR Partners ||$2,181||9.65%|
|7||Eagle Rock Energy Partners||$1,407||9.21%|
|8||NuStar Energy ||$3,897||8.75%|
|9||Legacy Reserves ||$1,495||8.74%|
|10||Exterran Partners ||$1,043||8.31%|
|11||Suburban Propane Partners ||$2,436||8.20%|
|12||Crestwood Midstream Partners ||$1,374||8.13%|
|13||Atlas Resource Partners ||$1,136||8.08%|
|14||Boardwalk Pipeline Partners ||$6,304||7.79%|
|16||Regency Energy Partners ||$4,135||7.61%|
|17||Energy Transfer Partners ||$14,200||7.59%|
|18||Enbridge Energy Partners||$8,727||7.55%|
|19||NGL Energy Partners ||$1,368||7.45%|
|20||Rentech Nitrogen Partners ||$1,573||7.40%|
|21||Crosstex Energy ||$1,397||7.39%|
|22||AmeriGas Partners ||$4,065||7.31%|
|23||PAA Natural Gas Storage ||$1,412||7.20%|
|24||Teekay Offshore Partners||$2,296||7.15%|
|25||Alliance Resource Partners ||$2,306||7.10%|
These stocks are a good place to start your research, but they’re not formal recommendations.
Let’s take a look at the top three:
1. Northern Tier Energy
First up is Northern Tier Energy LP (NYSE:NTI) with a trailing yield of 16.2%. Northern Tier Energy LP (NYSE:NTI) is a hybrid MLP which owns a refinery as well as a network of owned and franchised gasoline stations. Northern Tier Energy LP (NYSE:NTI) is benefiting from the large price differential between what oil is selling for in the Midwest, which is even lower than the WTI, and the price of gasoline and other refined products whose prices are reflective of the international price of oil.
Northern’s refinery lies along two pipelines, both owned by Enbridge Inc (USA) (NYSE:ENB): One comes into the U.S. from Canada while the other comes from the Bakken Shale in North Dakota. Northern’s refinery has been earning crack spreads that have continued to rise to nearly $38 per barrel, which is absurdly high. The MLP’s payouts are highly correlated to the company’s crack spreads. Efforts are under way around the country to change the pipeline network to mitigate the large spread between the price of WTI and the price of Brent crude. As these efforts move forward in the next year or so the price differential should decrease and with it so will Northern’s payouts. If you are looking for stable quarterly payouts then pass on Northern Tier.