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I have less than 20 years until I turn 65 and seriously consider retirement (or not). In the past year I wrote two articles, here and here, which showed me (if no one else) that I should try to get my total portfolio yield up over 4%. With less than a 20-year time horizon, and assuming the same stock price appreciation, a portfolio with higher yield and a lower (but still adequate) dividend growth rate (DGR), gives more total income, and better overall returns, than a portfolio with a lower yield, but higher DGR. (Of course one could argue that a higher DGR would lead to higher stock appreciation, but that is for another article.) As you get an investing time period of over 20 years, the higher DGR begins to outperform. So for younger investors I think it is OK to have lower yielding stocks with a higher DGR. But for me, with my shorter time horizon, I feel like I need to increase my yield. Another contribution will be made into my 401k in about a month, so I will be ready to add more positions to my portfolio. With my desire to increase my yield in mind I'm targeting some MLPs and their relatively high yields.

With the increase in energy production in the US, at least partially due to fracking technology, the prospects for MLPs for at least the next few years should be quite bright. Of course there are always risks, (higher interest rates, and a decline in economic activity causing a decrease in demand) but I try to keep things simple when thinking about investing. I'm not an analyst, and I know nothing about the energy industry except how to fill my gas tank. I don't read quarterly reports and I don't listen to conference calls. But I do know that I want more yield, without being guilty of "chasing" yield. I think that by using simple, straightforward, common sense metrics to analyze these investments, I will be able to achieve good long-term results and safely add some higher yielding MLPs to my portfolio. I'll do this by looking at the numbers, past and present, and letting them decide.

As a part time Investor with a full time job I'm not able to devote much time to evaluating stocks. So my criteria for choosing MLPs are fairly straightforward. They are:

  1. The stock must be on the CCC list maintained by David Fish. The Dividend Champions have raised their dividend for at least the past 25 years, the Dividend Challengers have raised their dividends for at least the last 10 years, and the Dividend Contenders have raised their dividends for at least the last 5 years.
  2. The stock must have a yield of 4% or greater.
  3. The Chowder Number (Dividend yield + 5 year dividend growth rate (DGR)) must be 8% or greater.
  4. The 1-year, 3-year, 5-year and 10-year DGRs must be fairly constant, and at least 4% or more for each period.
  5. Finally, I look at the FAST graph for each passing stock to ensure that the Funds From Operations (FFO) show a steady uptrend, and that the stock price is below, or at worst equal to, the fair value based on its FFO.

This screen produced 6 MLPs, each of which is reasonably priced for purchase now, and each of which is presented below.

All dividend data, (yields, growth rates, and future dividend estimates) are taken from the CCC list. The past returns and expected future returns were calculated by me, based on price data from Yahoo.com and the future dividend estimates from the CCC list.

Kinder Morgan Energy Partners (KMP)

Kinder Morgan Energy Partners, L.P. operates as a pipeline, transportation and energy storage company in North America. It delivers gasoline, diesel fuel, jet fuel, natural gas, natural gas liquids and CO2 through thousands of miles of pipelines, and also manages these products in its storage, treating and processing facilities. It is one of the largest MLPs in the country. KMP recently bought El Paso Corporation for $38 billion.

BUY CRITERIA:

Present Yield - 6.47%

# Years of Consecutive Dividend Increases - 17

Chowder Rule - 13.9%

Dividend Growth Rates 1yr - 5.9%, 3yr - 4.9%, 5yr - 7.4%, 10yr - 7.5%

FFO graph (orange line) in relation to price (black line)

Estimated dividends to be paid in the future: 2013 - $5.34, 2014 - $5.87, 2015 - $6.24, 2016 - $6.63, 2017 - $7.05. This represents a 7.1% DGR over the next 4 years, which is consistent with its five year DGR.

KMP has shown excellent results in the past. With reinvested dividends, KMP has produced an annual return of 17.59% since the beginning of the year 2000. It has shown an annual stock price increase during that time of 9.86%. Using the estimated dividends from the CCC list, and assuming a similar price increase in the future, the expected annual return through the end of 2017 would be 14.32%. But I would rather not depend on the future repeating the past, so, even if I assume a modest price increase of 5% per year, with reinvestment of the expected dividends, the annual return would still be 12.35%.

Alliance Resource Partners (ARLP)

Alliance Resource Partners, L.P. operates 11 underground mining complexes and engages in the production and marketing of coal, primarily to utilities and industrial users in the United States.

BUY CRITERIA:

Yield - 6.12%

# Years of Consecutive Dividend Increases - 11

Chowder Rule - 19.7%

Dividend Growth Rates 1yr - 14.7%, 3yr - 12.2%, 5yr - 13.6%, 10yr - 15.3%

FFO graph (orange line) in relation to price (black line)

Estimated dividends to be paid in the future: 2013 - $4.2*, 2014 - $4.25, 2015 - $4.67, 2016 - $5.14, 2017 - $5.65. This represents a 7.7% DGR, which is slower than what ARLP has done for the past ten years, and therefore is reasonably conservative.

(*ARLP has already paid out $3.39 this year, so to reach the $4.20 estimate the final dividend for this year would only be $0.81, a significant dividend cut. Since this is unlikely, for my future return estimates I will simply keep the dividends for next five quarters at the present rate, which is $1.153, and then begin to increase it again to match the estimates for 2015-2017.)

ARLP's performance has been very impressive over the past 13 years. With reinvested dividends ARLP has produced an annual return of 20.40% since the beginning of the year 2000. It has shown an annual price increase during that time of 14.10%. If that price increase were to continue for the next 5 years, and using the estimated dividends from the CCC list (as explained above), the expected annual return through the end of 2017 would be 15.45%. Even if the price increased a modest 5% per year, with reinvestment of the expected dividends, the annual return would still be 10.39%.

Holly Energy Partners (HEP)

Holly Energy Partners, L.P. operates petroleum product and crude pipelines, storage tanks, distribution terminals and loading rack facilities in the western United States.

BUY CRITERIA:

Yield - 5.46%

# Years of Consecutive Dividend Increases - 9

Chowder Rule - 10.8%

Dividend Growth Rates, 1yr - 5.1%, 3yr - 5.0%, 5yr - 5.4%, 10yr - N/A

FFO graph (orange line) in relation to price (black line)

Estimated dividends to be paid in the future: 2013 - $1.83*, 2014 - $2.01, 2015 - $2.19, 2016 - $2.39, 2017 - $2.61. This represents an 8.0% DGR over the next few years. Somewhat higher than its recent past, but not terribly unreasonable.

(*If HEP maintains the latest quarter's dividend of $.485 than it will have paid out $1.917 in dividends this year, more than the estimate. But for 2014 and beyond I will stick with the estimated dividends as per the CCC list.)

HEP has not been around as long as KMP or ARLP, having its IPO in July of 2004. But since that time it has done very well. With reinvested dividends it has produced an annual return of 19.11% since July of 2004. During that time the stock price has increased by 11.53% annually. If that price increase were to continue for the next 5 years, and using the estimated dividends from the CCC list, the expected annual return through the end of 2017 would be 14.54%. Even if the price increased a modest 5% per year, with reinvestment of the expected dividends, the annual return would still be 11.08%.

Alliance Holdings GP (AHGP)

Alliance Holdings GP, L.P. operates 11 underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia, and produces and markets coal primarily to utilities and industrial users in the United States.

BUY CRITERIA:

Yield - 5.11%

# Years of Consecutive Dividend Increases - 8

Chowder Rule - 26.6%

Dividend Growth Rates, 1yr - 19.7%, 3yr - 17.3%, 5yr - 21.5%, 10yr - N/A

FFO graph (orange line) in relation to price (black line)

Estimated dividends to be paid in the future: 2013 - $2.75, 2014 - $2.78, 2015 - $3.06, 2016 - $3.36, 2017 - $3.70. This represents a 7.7% DGR, which is lower than its recent past, and therefore is a nice conservative estimate.

AHGP, with reinvested dividends, has produced an annual return of 19.50% since May of 2006, when AHGP had its IPO. Since that time it has shown an annual price increase of 13.14%. If that price increase were to continue for the next 5 years, and using the estimated dividends from the CCC list, the expected annual return through the end of 2017 would be 14.45%. Even if the price increased a modest 5% per year, with reinvestment of the expected dividends, the annual return would still be 9.93%.

Plains All American (PAA)

Plains All American Pipeline, L.P., engages in the transportation, storage, terminalling and marketing of crude oil and refined products in the United States and Canada.

BUY CRITERIA:

Yield - 4.65%

# Years of Consecutive Dividend Increases - 13

Chowder Rule - 9.9%

Dividend Growth Rates, 1yr - 8.6%, 3yr - 5.4%, 5yr - 5.2%, 10yr - 7.2%

FFO graph (orange line) in relation to price (black line)

Estimated dividends to be paid in the future:*, 2013 - 2.14, 2014 - 2.16, 2015 - 2.19, 2016 - 2.21, 2017 - 2.24.

(*PAA is already paying more than $2.24 per year, so I will use a DGR of 5% over the next 5 years, which is slightly below its 3 and 5 year DGR.)

PAA, with reinvested dividends, has produced an annual return of 23.87% since the beginning of the year 2000. It has shown an annual price increase during that time of 15.45%. If that price increase were to continue for the next 5 years, and using the 5% DGR as mentioned above, the expected annual return through the end of 2017 would be 15.13%. Even if the price increased a modest 5% per year, with reinvestment of the expected dividends, the annual return would still be 9.19%.

Energy Transfer Equity (ETE)

Energy Transfer Equity, L.P., transports and sells natural gas to electric utilities, independent power plants, local distribution companies, industrial end-users and other marketing companies. The company also sells gasoline and middle distillates at retail; operates convenience stores in 25 states; and gathers, purchases, stores, transports, markets and sells crude oil and refined products.

BUY CRITERIA:

Yield - 4.07%

# Years of Consecutive Dividend Increases - 8

Chowder Rule - 15.4%

Dividend Growth Rates, 1yr - 6.4%, 3yr - 5.9%, 5yr - 11.4%, 10yr - N/A

FFO graph (orange line) in relation to price (black line)

Estimated dividends to be paid in the future: 2013 - $2.75, 2014 - $3.03, 2015 - $3.33, 2016 - $3.66, 2017 - $4.03. This represents a 10% DGR over the next few years. This seems somewhat high to me considering that its DGR over the last three years has been 5.9%, so I will use a DGR of 6% instead, just to stay conservative.

ETE, with reinvested dividends, has produced an annual return of 21.50% since it went public in February of 2006. It has shown an annual price increase during that time of 14.75%. If that price increase were to continue for the next 5 years, and using the estimated dividends from the CCC list, the expected annual return through the end of 2017 would be 14.48%. Even if the price increased a modest 5% per year, with reinvestment of the expected dividends, the annual return would still be 8.92%.

Conclusion

Every one of these MLPs has a total annual return, with reinvested dividends, of at least 17% for the past 7-13 years. And even assuming a modest increase in stock price of only 5% a year for the next five years, they are all expected to give a total return of at least 8% per year. They each have been steadily raising their FFO. But most important to me they all have a yield of greater than 4% and all have raised their dividends at a steady rate of 5% or more. This is the kind of steady, sustainable dividend yield I'm looking for. I already own KMP and PAA, and as a dedicated DGIer I will continue to hold these MLPs as an essential part of my portfolio, and even plan on adding more. ARLP, with its yield of over 6%, and a long-term history of strong dividend growth, will be the next new position that I will add. As long as nothing changes between now and when I have funds available I will be purchasing ARLP in the next month or two.

MLPs are conservative, high-yield investments which can provide solid, steady income and nice returns year after year. These six stocks have a good track record of increasing dividends and providing strong returns, and since they are still fairly valued they should continue to provide good returns for the next few years.

Thank you for reading my article. I welcome your comments and criticisms.

Source: 6 MLPs I'm Considering For My Dividend Portfolio