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Master limited partnerships (MLPs) remain a staple for investors seeking high yield. They’ve been much better investments than other parts of the oil and gas industry. For example, the midstream MLP operators are holding up much better than the oil and gas exploration players.
The SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) is down 43% over the last year while the Alerian MLP (NYSEArca: AMLP) is only down 15%. What’s more is that the Oil & Gas Exploration ETF only offers a 1.6% dividend yield. The Alerian MLP ETF is paying out a 7.3% distribution yield.
This outperformance and much stronger yield is due to the fact that MLPs are less tied to the price of oil. They tend to make money based on the amount of oil moved.
With the oil industry once again in focus, it’s time to rethink your oil exposure. Oil prices have been in a free fall over the last couple weeks, despite the fact that we’re in the midst of the summer driving season.
Overshadowing higher demand related to summer driving is the potential exit by Greece from the eurozone, which could lead to an economic slowdown in Europe. Then there’s the stock market turmoil in China, which could be signaling bigger and more negative issues about economic growth there.
Turmoil in the oil markets usually means turmoil for any stock remotely tied to oil. However, the MLP space is still offering enticing yields and has been getting rather interesting of late, with buyouts and reconsolidations.
So, while the beaten-down oil trade isn’t working out, there are still companies making money while oil prices remain in flux. Recall that toward the beginning of the year I talked about three MLPs to play the oil selloff. All three still yield in excess of 4.5%.
The two MLPs below offer distribution yields in excess of 6%, but they are also a couple of the biggest players in the market.
Energy Transfer Partners LP (NYSE: ETP)
Energy Transfer Partners is one of the most diversified players in the MLP market, with exposure to a variety of geographical markets and commodities. But one of the real draws is its 7.7% distribution yield.
It has two major pipelines coming online in the next couple of years. One of those will be connected to the Marcellus and Utica shales in Pennsylvania, West Virginia and Ohio. The other will move oil from the Bakken Shale in North Dakota and connect the area with the Gulf Coast. These pipelines will go a long way in boosting the company’s fee-based revenues.
The big news for Energy Transfer Partners is that its sponsor Energy Transfer Equity LP (NYSE: ETE) – a parent company of sorts – is looking to buy Williams Cos. (NYSE: WMB). This move could help reduce competition for Energy Transfer Partners, where Energy Transfer Equity would force the separate MLPs to focus on their highest growth markets and introduce a cooperative nature (versus a competitive one) to maximize cash flows.
Plains All American Pipeline LP (NYSE: PAA)
Plains All American is interesting, given that nearly 80% of its revenues are from fee-based operations, meaning it’s less tied to oil prices. Its distribution yield is a healthy 6.3%.
What’s more is that Plains will be one of the big benefactors of the resurgence of crude oil production in North America, assuming we eventually find a supply and demand balance. Plains has a presence in the country’s top basins, including the Permian, Bakken and Eagle Ford shales.
Like Energy Transfer Partners, Plains has a large scale and reach. This type of size and scope gives it consistent and diversified growth. The other key business for Plains All American is its logistics business, which actually benefits from oil price volatility, allowing it to make money in a variety of oil price environments.
The biggest MLPs are the ones looking the most enticing right now. And it doesn’t’ hurt that they are offing distribution yields in excess of 6%, which is more than triple the average S&P 500 dividend yield.
Dividends for Every Month of the Year
If you’re looking for just one dividend stock to round out your income stream, consider a little-known company that pays out dividends 12 months of the year.
Click here to see the full details of this company in my Dividend Calendar…