High yields can be found in MLPs (Master Limited Partnerships). Usually structured around a particular qualified business (often energy-related), MLPs do not pay a corporate income tax, as they pay pass profits on directly to the shareholders (technically unit-holders) on a quarterly basis. These payments, however, are not technically dividends–they are distributions, and as such have a special tax status. Unlike dividends, a large percentage of these distributions are considered to be “return of capital,” and therefore you only pay taxes on them once you sell the stock. This allows for interesting tax-deferral strategies.
The following three MLPs pay generous distributions and are well-regarded by most analysts. Would it be wise to initiate a position in any of them?
Eagle Rock Energy Partners, L.P. (NASDAQ:EROC): The company is involved in the production of mostly oil and some natural gas, and owns 8,000 miles of gathering pipelines in the Southern United States, as well as 21 gas processing plants.
1). From a valuation standpoint, the company does not have a current P/E ratio, as earnings per share were negative last quarter. However, future P/E stands at 30.32.
2). Average analyst target price is $10.30, which implies a potential upside of 9.57% from current prices. Recent price targets, however, have been higher than the current average of $10.30. Mean current recommendation is 2.40 (with 1 being strong buy, and 5 a strong sell).
3). The distribution is $0.88/share, which works out to a very attractive 9.36% yield.
4). My take: Value-wise this stock is not very attractive: valuation ratios are either high or nonexistent. If the company is not able to return to profitability this year, then this stock will probably underperform. However, future prospects are good: a recent partnership with BP for gathering and processing in the Texas Panhandle should help the company’s cash flow, and a good contract strategy should keep the company relatively hedged from further natural gas price declines. With good growth prospects and attractive yields, investors should consider buying this MLP.
Mid-Con Energy Partners LP (NASDAQ:MCEP) : The company is engaged in the acquisition, development, and production of oil properties in the United States (mostly in Oklahoma and Colorado). Known for its water-flooding technique, the stock has risen 20% YTD, but still retains attractive valuation ratios and distribution yields.
1). While currently trading at a not-so-cheap P/E of 18.36, the forward P/E is a more attractive 11.14.
2). Analysts are generally bullish on the stock. They have an average price of $25.33 (which implies a potential price upside of +13.08%), and an average recommendation of 1.40.
3). With the recent price surge, the yield has dropped to 8.66%. While still a very high figure, the yield was in the double digits in December. At any rate, MCEP pays an attractive distribution of $1.94/unit.
4). My take: While not necessarily a value play, MCEP is certainly a growth play. Rapid increases in production, possible joint ventures, ample access to capital, smart hedging strategies, and attractive yields make this a stock definitely worth considering.