Master limited partnerships (MLPs) are proving to be great investments. But it’s not just because they pay very juicy yields. They are also great ways to play the energy boom in the U.S.
The surge in oil and gas rich shale plays, and new technologies for extracting oil and gas, means that the U.S. could be energy independent by 2035, according to the IEA. U.S. crude oil and natural gas imports have been steadily declining over the last five years. In fact, crude oil production in the U.S. is up over 50% since 2008.
All this oil and gas being sourced from within the U.S. needs to be transported somehow. That’s where oil and gas MLPs come into play. The MLPs are at the heart of America’s push for energy independence. As a result, these MLPs tend to perform well regardless of the price of oil and gas.
The top MLPs in the U.S. are not only exposed to the fast growing energy infrastructure industry, but they also offer some of the juiciest dividends in the market. They are able to generate impressive levels of cash flow from their stable businesses and distribute the majority of that cash flow to business owners.
That’s a big positive considering the S&P 500 has an average dividend yield of 1.9%, and the 10-year Treasury note is yielding 2.5%. Those yields are rather depressing, but income investors can make out very well with MLPs.
Some of the top MLPs in the market are offering yields in excess of 7%. And these MLPs will only see their cash flows increase as new supplies of oil and gas need to be brought to market. This means investors will not only enjoy rising distributions, but could also see gains from capital appreciation.
The 3 Best MLPs Yielding More Than 7%
1. Kinder Morgan Energy Partners LP (NYSE: KMP)
Kinder Morgan Energy Partners offers a distribution yield of 7.2%. This is one of the largest MLPs available in the market. It has a vast asset base that’s key to North American energy infrastructure. These include various natural gas pipelines, terminals, and oil production fields.
However, the MLP has underperformed the broader market over the last twelve months, and is actually down 13% over that period. It’s also now one of the cheapest MLPs around on a P/E basis.
Last month it posted earnings that were in line with consensus and up 10% year-over-year. Its CEO and Chairman Rich Kinder has bought over $35 million in shares of Kinder Morgan Energy Partners’ parent company, Kinder Morgan, Inc. (NYSE: KMI). Rich Kinder has told skeptics of his company, “You sell. I’ll buy. And we see who comes out best in the long run.”
Rich Kinder notes that both Kinder Morgan and Kinder Morgan Energy Partners are trading at the largest discounts to fair value since 2006.
2. El Paso Pipeline Partners, L.P. (NYSE: EPB)
El Paso Pipeline Partners offers one of the highest yields among MLPs, coming in at a robust 8%. What’s more is that El Paso Pipeline Partners has managed to increase its distribution in each of the last six years. Thanks in large part to its stable cash flows.
This MLP gets around 90% of its revenues from fee-based long-term contracts. El Paso Pipeline Partners is also relatively low-risk, given its exposure to stable customers. The majority of its customers are major natural gas utility companies, including Atlanta Gas Light Co. and Alabama Gas Corp.
3. Enbridge Energy Partners, L.P. (NYSE: EEP)
Enbridge Energy Partners boasts a distribution yield of 7.2%. This MLP has managed to up its annual distribution for four consecutive years. It also owns one of the world’s longest petroleum pipeline systems, Lakehead System.
Lakehead System is the key delivery method for getting crude oil from Western Canada to the refineries in the Midwestern U.S. Enbridge Energy’s pipelines carry between 60% and 70% of the daily volume of Canadian crude oil into the U.S.
In addition to that, Enbridge Energy also has a presence in one of the U.S.’s most prolific shale plays. It owns nearly 70% of the crude oil pipeline takeaway capacity from the Bakken shale.
These MLPs were created to reward shareholders. By offering yields of over 7%, that’s just what they are doing. Unlike REITs, which are focused on the shaky real estate industry, MLPs give investors access to the fast growing energy industry. These three best MLPs that yield over 7% are a great place to start when looking to build an income-focused portfolio.
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