Six High-Yielding MLPs

Income partnerships, generally known as Master Limited Partnerships or MLP's or U.S. Income Partnerships, are investments that are similar to income royalty trusts, except that they are structured as limited partnerships. MLP's have certain advantages over regular stocks with high dividends. There is no double taxation because the income is passed through without being taxed at the corporate level. Also, they can pass through tax deductions. However, there are a couple issues you should be aware of, that make them different from income trusts.

For example, income partnerships don't send out 1099 forms, they send out a Schedule K-1 Form, and the income is reported on your tax return differently from regular dividends. In addition, you should never, ever put an MLP into a retirement plan because of the UBTI or Unrelated Business Taxable Income problem, which could put the tax deferred status of your retirement plan in jeopardy, based on what I understand. MLP closed end funds should not be a problem. However, since I am not an accountant, please discuss MLP's with your accountant or CPA for clarification, before investing in MLPs.

Most MLP's are generally involved in pipeline businesses, usually oil and gas, and usually have very high dividends. Here are some with high yields:

• Terra Nitrogen Company, L.P. (TNH) a Sioux City, Iowa based company producer and distributor of nitrogen fertilizer products, has a yield of over 16.9%. They distribute anhydrous ammonia and urea ammonium nitrate solutions. This New York Stock Exchange company has a P/E of 6.
• Atlas Pipeline Partners LP (APL) is a Pennsylvania based company natural gas distributor with approximately 7,900 miles of intrastate gas gathering pipelines, that yields 16.5%. They have a forward P/E of 7 and a PEG of 2.56.
• Rio Vista Energy Partners LP (RVEP), a producer of oil and natural gas, yields 16%. Earnings have recently been negative.
• Teekay LNG Partners LP. (TGP) is a marine transportation company which yields 15%. They transport liquefied natural gas, liquefied petroleum gas, and crude oil. The stock has a forward P/E of 9 and a PEG of 1.99.
• Ferrellgas Partners LP (FGP), the propane distribution company, has a yield of 12.3%. This Overland Park, Kansas company distributes gas throughout the U.S. The stock has a P/E of 40 and a PEG of 2.88.
• Energy Transfer Partners L.P. (ETP) which has a payout of 9.8%. The company is in the business of transporting and storing natural gas through its pipelines. The stock, which trades on the NYSE, has a P/E of 9.

Disclosure: Author does not own any of the above.

Comments

[DaveW:]

Thanks for the article. I would be interested in hearing your thoughts on Linn Energy, LLP (LINE) and why it's not on this list. The last I heard its dividend was around 19-20%. Are you avoiding it due to Cramer's recent pump?

2008 Oct 24 08:57 AM

[mindracer:]

Good article. I am long ETP, but short APL, because the company is very sensitive to commodity prices. According to a recent Wachovia research report, APL's coverage ratio (distributable cash flow divided by expected distributions) falls below 1.0 once oil reaches $70 per barrel. WIth oil declining toward $50, the coverage ratio is closer to 0.6. In other words, that juicy yield may not get paid out, and investors will bail.

2008 Oct 24 05:36 PM

[Wolfhounds:]

I would be more interested in an MLP like KMP which yields about 8%, but probably has a sounder business than the ones you mention.

Also, MLP's throw off tax losses because of high tax depreciation and depletion allowances. Tax laws require limited partner investors to defer recognition of those losses until the shares are sold. The caveat is, those tax losses and distributions reduce your tax cost (basis) each year. When your basis is zero any further distributions are taxed. One way of extending the breakeven point is reinvesting the distributions, which add to basis. If held in a tax deferred account, the shares can be sold at the later point then repurchased. This strategy would start the basis reduction cycle over.

2008 Oct 25 10:44 AM

[NOWHEREMAN:]

TNH, earnings and payout are about to be crushed. TNH is Cyclical, With the price of corn at these levels expect usage of Nitrogen Fertilizer to Plummet and with it TNH.

Farmers are no longer making a huge profit, have to pay off their loans on the Equipment they purchased as little as 18 months ago and have no incentive to grow more corn. The Previous Historical High For TNH was around $50. Look for it to drop to that level.

Instead of TGP, please consider TNK which a pure Oil transportation Play. I own it from $17, plan to add more if it drops to $8.50. Their fleet is amongst the newest built.

As far as Pipelines, WMZ is a spinoff from WMB, they Guaranteed a minimum payout of $1.12 annually in their Charter. It came out about 8 months ago. If it punches below $11 again, I will buy it.

These are my picks, I would like to see them drop irrationally over the next 30 days.

But then, I would also like to see DD approach $20 (a Multi Decade low which would yield 9%) and Morgan Stanely below $10. With the market's volatility, I would think MER is contributing nicely regardless direction.

2008 Oct 25 01:34 PM

[notsosmart:]

good info by all

2008 Oct 25 06:06 PM