Top 3 MLP to Buy For High Yield

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We believe that income-seeking investors consider having a primary limited partnership, or MLP. These stocks typically deliver very high yields, often in the low one to double digit range.

Of course, high returns often come with high risk, so investors need to identify high-quality MLPs that are likely to continue to at least maintain, if not increase, their distribution.

Three of our top high yielding MLPs that we believe will continue to deliver high returns to shareholders include:

• Company Product Partner (NYSE:EPD)
• KNOT Offshore Partner (NYSE:KNOP)
• Midstream Magellan Partners (NYSE:MMP)

Enterprise Product Partner (EPD)

Our first name to consider is Enterprise Product Partner, one of the largest MLPs in the industry. The $54.5 billion partnership generates nearly $41 billion in annual revenue.

Product Partners The Company stores and transports oil and gas through its large piping systems. In total, the partnership has nearly 50,000 miles of pipeline transporting natural gas, natural gas liquids, crude oil and refined products. The Company’s Product Partners have storage facilities that can hold more than 250 million barrels.

The extensive partnership pipeline provides asset diversity and geographic reach. The Company’s Product Partner can also rotate its piping system to move any energy product it wants. This gives Enterprise Product Partners an asset base that few other companies in the industry can match. It will be very expensive and may even be politically impossible for other partnerships to try to emulate what the partnership has created.

The Company’s Product Partners collect fees for the materials it transports and stores, making these partnerships a toll road for those looking to move energy products. This helps protect the business from the ups and downs of the energy price cycle.

The Company’s Product Partners are also well positioned to take advantage of the growing demand for liquefied natural gas and liquefied petroleum gas. The partnership has a number of terminals that will assist businesses as US exports grow over the next few years.

Credit ratings of BBB+ and Baa1 from Standard & Poor’s and Moody’s, respectively, mean that the partnership has a better balance sheet than most MLPs.

The business has been very successful over the years, which has allowed the Company’s Product Partners to increase their dividends for 23 consecutive years. This includes a 3.3% increase for the February 11, 2022 payout. The Company’s Product Partner differs from most other companies in that it frequently increases its dividends every quarter, except for 2021, where dividends remain constant for all four payments. Using the new annual dividend, the distribution has had a CAGR of over 4% over the last decade.

The stock yields 7.4%, more than five times the average yield of the S&P 500 Index. The dividend also looks to be in a very good position, as Corporate Products Partners have an average distributable cash flow per unit payout ratio of 57% over the last decade. Combining this reasonable payout ratio with a distribution coverage ratio of over 1.6x, the Company’s Product Partners are poised to continue increasing their already huge dividend.

KNOT Offshore Partner (KNOP)

Our next MLP choice is KNOT Offshore Partners, which owns and operates shuttle tankers in the North Sea and Brazil. The partnership had a market cap of $525 million and revenue of $279 million last year.

Knutsen NYK Offshore US tanker, which is the sponsor of the partnership, is responsible for locating, purchasing and unloading vessels to KNOT Offshore Partners. As a result, the business is highly efficient and has only one employee, the CEO.

This partnership provides loading, transportation and storage of crude oil on a time charter and bareboat charter. Currently, there are seventeen shuttle tankers in operation, most of which have long-term, fixed contracts that must be paid regardless of the energy price. KNOT Offshore Partners’ shuttle tankers have an average lifespan of under 8 years, meaning that the partnership could see decades of use from its current fleet.

Due to its business model, KNOT Offshore Partners has not seen the fluctuations in cash flow that can be distributed per unit as experienced by many of its peers. This is because of the contractual agreement and its ability to see higher rental rates when energy prices are higher. This pattern is likely to continue as sponsors may unload as many as three new shuttle tankers by the end of the year.

At the time of the most recent quarterly report, KNOT Offshore Partners had a 91.9% utilization rate. This is below the previous year’s results, but this is largely due to the timing of the lease contract and mechanical problems with other shuttles.

KNOT Offshore Partners has maintained the same quarterly distribution of $0.52 per share since the November 13, 2015 payout. The expected coverage ratio for last year is only 1.2, lower than in recent years. The expected distributable cash flow payout ratio is also higher than usual at 84% for 2021. Historically, the payout ratio is close to 70%. Therefore, we do not anticipate that the partnership will increase dividends in the near future. The tradeoff for this lack of growth is that shareholders received a 13.4% yield today.

Even with a high payout ratio and a lack of dividend growth, we remain confident that KNOT Offshore Partners will be able to continue making payments to shareholders. The business model has proven successful in navigating the difficult operating environment and energy prices set to soar, KNOT Offshore Partners are expected to continue to see high demand for shuttle tankers.

Magellan Middle Stream Partner (MMP)

Our final choice among MLPs is Magellan Midstream Partners, which operates an extensive pipeline network. The partnership is valued at $10.4 billion and has annual revenues of $2.8 billion.

Like Corporate Products Partners, Magellan Midstream Partners operate one of the longest pipeline systems for processed products in the country. The partnership operates 9,800 miles of pipeline and 54 terminals used in the transportation of processed products. The two storage facilities can also hold 18 million barrels of product. The partnership also has a 2,200-mile pipeline of crude oil and can store 37 million barrels. Magellan Midstream Partners connects to nearly half of its US refining capacity, giving it a size and scale that few, if any, can match.

Given Magellan Midstream Partners’ extensive pipeline and storage network, this partnership can offer customer connections between refineries and gas stations and railroads in most countries. As a result, Magellan Midstream Partners contracts often include inflation-adjusted fee increases, which almost certainly benefits the partnership given rising inflation.

Magellan Midstream Partners has a fee-based model. Less than 10% of operating income is sensitive to energy prices, helping to protect partnerships from market downturns. This may limit some of the upside potential, but this business model offers stability in an industry where stability is rare.

Magellan Midstream Partners had raised its dividend 70 straight quarters before freezing it due to the Covid-19 pandemic. The partnership last raised its dividend by 1% for the payout date November 12, 2021. The payout ratio is expected to be 80% for 2021, in line with the average for the last five years. Leaders also have a minimum coverage ratio target of 1.2. Our expected coverage ratio for 2022 is 1.25 higher than this target. Partnership shares yield 8.5%.

Final Thoughts

Investors looking for a safe source of high yields don’t often have too many options to choose from. Corporate Products Partners, KNOT Offshore Partners and Midstream Magellan Partners are three names we believe can continue to offer investors abundant returns that appear safe from dividend cuts.

Each of these MLPs has a competitive advantage that helps set it apart from the rest of the industry, leading to the great results each has to offer. Each partnership also has enough coverage that a dividend cut is unlikely to happen soon.

This indicates that investors seeking safe and high yields are considering adding Enterprise Product Partners, KNOT Offshore Partners or Midstream Magellan Partners to their portfolio.

As of the date of publication, Bob Ciura has no (direct or indirect) position in any of the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publishing Guidelines.

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