The Best Play on the Shrinking MLP Universe

Dividend Investing, Energy Investing, Master Limited Partnerships (MLPs)

The DCP Midstream (DCP) buyout offer earlier this month marked another master limited partnership (MLP) coming off the board. Over the last eight years, the number of publicly traded midstream MLPs declined by 74%.

Here’s what that means for investors, especially those who like the tax-advantaged, high-yield income from MLPs…

On August 18, Phillips 66 (PSX) announced an offer to buy all of the publicly traded units of DCP for $34.75 per share. The DCP general partner interests are controlled by PSX and Enbridge, Inc. (ENB), so this deal will be done without an investor vote.

From the 1980s until the 2014-2016 energy sector crash, the MLP business structure dominated energy midstream services (pipeline, storage, and terminals). Sponsor companies like Phillips 66 owned the general partner interests, and investors like us owned limited partner units. MLP investors earned tax-advantaged and usually nicely growing distributions. General partners saw the cash flow from their ownership stake grow even faster.

Starting in late 2014, and over the next year, the price of crude oil went from more than $100 per barrel to less than $30. The MLP business model of funding growth through new debt and equity stopped working. By early 2016, the Alerian MLP index had lost 62% of its value; it has not recovered.

During the dark age of energy midstream, MLP sponsors/GPs started to roll up the limited partnerships, absorbing them into their corporate entities. For example, Kinder Morgan (KMI), which operated as the general partner, bought in Kinder Morgan Energy Partners LP. These transactions in the MLP space happened again and again. The number of midstream MLPs went from 76 in October 2014 to a current 20.

The good news is that the surviving MLPs are financially stable and pay attractive yields. Plus, most are growing distributions. The MLP structure means that income earned by investors is a non-taxable return of capital. Taxes get handled at tax time from the Schedule K-1s sent to investors. In most cases, an MLP investment will generate non-taxable income for many years.

Here are the seven MLPs with market caps over $5.0 billion. I include the current yield and year-over-year distribution growth:

  • Enterprise Products Partners LP (EPD)
    • Market cap: $58.2 billion
    • Current yield: 6.95%
    • Dividend growth: 3.3%
  • Energy Transfer LP (ET)
    • Market cap: $36.5 billion
    • Current yield: 6.4%
    • Dividend growth: 24.2%
  • MPLX LP (MPLX)
    • Market cap: $32.9 billion
    • Current yield: 8.7%
    • Dividend growth: 2.6%
  • Cheniere Energy Partners LP (CQP)
    • Market cap: $25.7 billion
    • Current yield: 5.6%
    • Dividend growth: 32.7%
  • Magellan Midstream Partners LP (MMP)
    • Market cap: $10.7 billion
    • Current yield: 8.1%
    • Dividend growth: 1.0%
  • Western Midstream Partners LP (WES)
    • Market cap: $10.7 billion
    • Current yield: 5.9%
    • Dividend growth: 31.4%
  • Plains All American Pipeline LP (PAA)
    • Market cap: $8.1 billion
    • Current yield: 6.8%
    • Dividend growth: 21%.

Some of the big dividend increases are due to companies staying conservative through the pandemic and now catching up with where distributions should be. The low dividend growth MLPs haven’t yet restarted growing payouts coming out of the pandemic.

Due to potentially adverse tax issues, midstream MLPs should not be owned in qualified retirement accounts, such as IRAs. The InfraCap MLP ETF (AMZA) provides balanced investment exposure to the listed MLPs without the tax issues. AMZA sends out Forms 1099 at tax time, but the ETF income pass through the MLP tax advantages on that income. AMZA currently yields 8.25%.That’s just one of the low-risk, high-income stocks I recommend to my Dividend Hunter members after personally vetting them. To see what else is on my list, and how I’m making double-digit income every year, join today – click here.

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