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After a relief rally in 2016, oil and gas prices are plunging again. The price of WTI crude oil has fallen back below $50 per barrel in the U.S., which has sent energy stocks tumbling again.
However, investors interested in dividend income should take a closer look at high-quality high yield MLPs like Magellan Midstream Partners (NYSE: MMP), Enterprise Products Partners (NYSE: EPD) and Buckeye Partners (NYSE: BPL).
Magellan, Enterprise Products and Buckeye Partners have all increased their dividends for more than 10 years in a row. These years include the Great Recession of 2007-2008, as well as the current downturn.
These three high-yield MLPs have dividend yields ranging from 5% to 7%. Plus, their fundamentals have remained healthy during the current downturn, which means their dividends are sustainable, even at $50 oil.
Toll Road Business Models
Investors might be reluctant to buy MLPs, and who could argue? Many MLPs were ravaged when oil and gas prices fell from 2014 to 2016.
Several MLPs had to cut their dividends to survive. Some suspended their distribution payments altogether. A few ended up in bankruptcy.
However, it is important to remember that the hardest-hit MLPs were in the upstream segment of the oil and gas sector. Upstream refers to exploration and production activities, which are highly reliant on the price of the commodity.
Magellan, Enterprise Products and Buckeye are all midstream MLPs. This means they operate oil and gas storage and transportation assets, such as pipelines and terminals. Magellan owns 9,700 miles of refined products pipeline, along with 80 terminals.
Enterprise Products is an industry goliath. It has a massive network of assets, which includes nearly 50,000 miles of natural gas, natural gas liquids, crude oil and refined products pipelines. It also has more than 250 million barrels of combined storage capacity.
Lastly, Buckeye Partners’ assets include 6,000 miles of pipelines and over 100 terminals. These facilities gave an overall capacity of 55 million barrels.
The major difference between midstream and upstream companies is that midstream companies operate more like toll roads . . . they collect fees based on volumes. Most of their revenues are not based on commodity prices.
Only a small portion of businesses of these high yield MLPs are devoted to activities that are reliant on a high price of oil and gas. This makes them heavily insulated against declines in commodity prices, and it is why all of them continued to raise their dividends over the past three years.
High Yield MLPs With Steady Growth
Not only do all three MLPs have high dividend yields, but they raise their distributions on an annual basis. Their consistent dividend growth is thanks to their high cash flow. Magellan’s cash flow increased 1% last year, and more than covered its distributions. Magellan’s crude oil business posted double-digit profit growth last year. Cash flow hit a record for Magellan last year.
Enterprise Products grew its cash flow by 3% last year, to over $4 billion. Throughput volumes increased by double digits in the natural gas liquids, refined products and petrochemicals segments. Buckeye Partners also had a record year. In 2016, its EBITDA eclipsed $1 billion for the first time ever.
These high yield MLPs are off to equally impressive starts to 2017, despite oil falling below $50 again. Magellan’s first-quarter cash flow grew by 8%, thanks to its refined products unit, which saw nearly 30% growth.
Enterprise Products’ cash flow increased 7% in the first quarter, above $1 billion. Its crude oil pipelines business grew by more than 30% for the quarter, an indication that demand remains strong, which could actually be a benefit of low oil prices. Buckeye Partners reported a 7% increase in first-quarter cash flow.
High Yield MLPs: Share Prices Down
These stocks have seen their share prices dip in 2017, which has elevated their dividend yields to attractive levels. Investors can hardly be blamed for rushing out of energy stocks, given what transpired in 2014 and 2015 when oil prices were previously at these low levels. When it comes to oil stocks, it seems that the investment community has a case of “once bitten, twice shy.”
These three high yield MLPs are able to cover their hefty distributions. Magellan has a 5% current yield, while Enterprise Products and Buckeye Partners yield 6% and 7.7%, respectively. These yields range from two to three times the average dividend yield in the S&P 500 Index. That makes them attractive choices for income investors.