This will be the first of a series of articles focusing on specific industries and isolating the CCC companies within those industries.
Note:The Dividend Champions spreadsheet and PDF have been updated through 2/28/11 and are available here. Note that all references to Champions mean companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of 5-9 years. Together, all of these companies may be referred to using the abbreviation “CCC.”
What are MLPs?
Master Limited Partnerships, or MLPs, are specialized companies that are not organized as typical corporations, instead issuing partnership units in place of common shares. Adhering to special provisions of the tax code, these partnerships are “pass-through” entities that are not subject to taxation, instead passing along all of their income and expenses (and responsibility for any taxation) to owners of these partnership units. Here is a brief description. Note that the criteria for maintaining MLP status requires that the company derive at least 90% of its cash flows from real estate, natural resources, or commodities. The vast majority of the MLPs that are publicly traded are engaged in the area of oil and gas transportation, processing, and storage. A good source of industry-wide information can be found here.
Technically, MLPs do not declare dividends, but instead make “distributions,” generally on a quarterly basis. Because partners also receive an appropriate portion of expenses, such as depletion and depreciation, their net income is typically much lower than the gross amount of the distributions. As a result, taxable income is low and the distributions are largely treated as a return of capital, which reduces the investors' cost basis. Over time, this means that, instead of being taxed on current income, MLP investors will enjoy increasing capital appreciation that has the potential of reducing the cost basis to zero, turning the entire initial investment into a capital gain (when sold), which (currently) would be taxed at rates below those of “ordinary” income. If and when the cost basis is reduced to zero, subsequent distributions are considered current income.
The Nuisance Factor
Many potential MLP investors are deterred by the supposed tax “nightmares” that revolve around reporting requirements. MLPs issue a K-1 form instead of the 1099 forms that stock owners receive at the end of each year. The K-1 form spells out his or her share of partnership income, gains, losses, deductions, and credits.
Unlike 1099 forms, K-1s are not required to be mailed by January 31, so delays in receiving the forms may delay tax filing. Because of the numerous elements involved, individuals may also find the forms confusing, so employing a good tax professional is usually a wise move. (Note that this article does not intend to offer tax advice, and it should not be considered authoritative in that area.) Of course, in discussing the tax advantages of MLPs (little current tax income, reduction of cost basis, etc.) relates to owning MLPs in a taxable account. Many advisors suggest that MLPs should not be owned in a tax deferred (retirement) account, simply because doing so fails to take advantage of the favorable taxation enjoyed by “normal” MLP ownership, effectively turning low-tax income into income that will be taxed at “ordinary” rates upon withdrawal.
The knock against owning MLPs in retirement accounts has some validity, and even the NAPTP (see above) cautions against it, although its primary concern is UBIT, or Unrelated Business Income Tax, which is income unrelated to the MLP's exempt purpose. If such income exceeds $1,000 per year, then the status of a retirement account can be endangered. However, few MLPs generate such income and it would take ownership of thousands, if not tens of thousands, of partnership units before an individual would be likely to earn a significant amount of UBIT.
The more general notion that owning MLPs in retirement accounts would “waste” the tax advantages may also be overblown for two reasons. First, the idea of turning low-tax income into income taxed at ordinary rates (on withdrawal) also applies to other potential investments, including stocks, so if the investor eliminates such investments from consideration in his or her retirement accounts, then that person may be left with very few alternatives. More important, of course, is owning assets that will grow as much as possible, no matter what the tax rate may eventually be on withdrawal...and that rate may actually be lower than their current marginal rate.
The second reason not to be dissuaded revolves around practicality. Given the increased use and funding of 401k, IRA, and other retirement accounts, potential investors may not even face a choice of whether to own something in taxable or tax-deferred accounts. If all your investable cash is in a 401k or Roth IRA, then the choice is simple.
The Companies
The bad news is that there are no Champion MLPs. But that's just because they haven't been around long enough to have streaks of higher distributions that stretch to 25 years or more. The longest streak belongs to Buckeye Partners (BPL) at 16 years, followed closely by Kinder Morgan (KMP) at 15 years and Enterprise Products Partners (EPD) at 14. The good news is that MLPs are the fastest growing industry (in terms of the numbers of companies) and the 30 Contenders and Challengers listed below (with one exception) offer yields between 3.83% and 7.98%, as of February 28.
Although there have been MLPs that had to cut or freeze their distributions, they appear to be few in number, and most of those listed actually increase their distributions each quarter. Because the yields are relatively high, most of the growth rates are somewhat modest, but should keep up with inflation. Investors can also get some geographic diversity, as demonstrated by this map of the operations conducted by Kinder Morgan (KMP).
Unfortunately, because of the nature of their earnings and distributions, traditional measures like the Price/Earnings ratio, the Payout Ratio, and the PEG Ratio are too high to be comparable to other companies, so I'm showing Market Cap, which may be a good indication of the financial stability of the MLPs shown, along with the percentage variation from each security's 52-week high and low.
Note that most are trading close to their highs, but a few stand out as having soared dramatically from their low prices. I've shortened up the Industry column due to table width concerns, but most of these MLPs can be described as oil and gas pipeline companies.
MLPs could be called “middlemen” in the chain of extracting and bringing these elements to market, but that simple term obscures the fact that many of these companies own not only the pipelines, but also the storage and processing facilities. Because their revenue and income comes from the handling of oil and gas, they are not as vulnerable to commodity prices as are the major oil and gas companies.
No. | 2/28 | MktCap | % from | % from | DGR | |||||||
Company | Symbol | Industry | Yrs | Price | Yield | ($Mil) | Low | High | 1-yr | 3-yr | 5-yr | 10-yr |
Alliance Holdings GP | Coal | 6 | 55.14 | 3.83 | 3,300 | 110.9 | 3.4 | 12.8 | 22.6 | n/a | n/a | |
Alliance Resource Part. | Coal | 9 | 77.24 | 4.45 | 2,840 | 103.5 | 0.7 | 8.6 | 13.4 | 15.3 | 12.4 | |
AmeriGas Partners LP | Propane | 6 | 48.28 | 5.84 | 2,760 | 37.9 | 6.3 | 5.1 | 4.9 | 4.5 | 2.4 | |
Boardwalk Pipeline LP | Natural Gas | 6 | 33.21 | 6.26 | 6,400 | 129.2 | 3.0 | 4.1 | 5.4 | n/a | n/a | |
Buckeye Partners LP | Oil&Gas | 16 | 64.82 | 6.09 | 3,340 | 44.0 | 9.6 | 5.5 | 5.9 | 6.2 | 4.8 | |
Crestwood Midstream | Natural Gas | 5 | 30.10 | 5.71 | 858 | 87.2 | 5.3 | 8.0 | n/a | n/a | n/a | |
DCP Midstream Part. | Natural Gas | 6 | 42.26 | 5.84 | 1,590 | 56.4 | 0.8 | 0.8 | 7.0 | n/a | n/a | |
Duncan Energy Partners | Oil&Gas | 5 | 40.73 | 4.47 | 2,350 | 82.9 | 0.7 | 3.6 | 19.4 | n/a | n/a | |
Energy Transfer Equity | Natural Gas | 5 | 40.19 | 5.37 | 8,960 | 47.5 | 1.7 | 2.6 | 14.0 | n/a | n/a | |
Enterprise Products LP | Oil&Gas | 14 | 43.60 | 5.41 | 36,710 | 50.1 | 1.7 | 5.5 | 6.1 | 6.6 | 8.3 | |
EOG Resources Inc. | Oil&Gas | 12 | 112.31 | 0.57 | 28,540 | 31.5 | 2.5 | 7.0 | 22.7 | 32.4 | 25.1 | |
Exterran Partners LP | Oil&Gas | 5 | 29.70 | 6.36 | 953 | 59.2 | 4.9 | 0.3 | 10.4 | n/a | n/a | |
Genesis Energy LP | Oil&Gas | 8 | 29.18 | 5.48 | 1,160 | 88.6 | 1.2 | 9.2 | 17.0 | 19.6 | (1.8) | |
Holly Energy Partners | Oil&Gas | 7 | 59.65 | 5.67 | 1,320 | 55.3 | 0.1 | 5.1 | 5.6 | 22.8 | n/a | |
Inergy LP | Propane | 10 | 41.48 | 6.80 | 4,550 | 36.7 | 5.6 | 5.7 | 6.3 | 6.8 | n/a | |
Kinder Morgan Energy | Oil&Gas | 15 | 73.65 | 6.14 | 23,280 | 28.3 | 0.5 | 2.9 | 8.4 | 7.1 | 10.9 | |
Magellan Midstream LP | Oil&Gas | 11 | 60.44 | 5.01 | 6,800 | 51.7 | 0.9 | 2.4 | 5.3 | 8.1 | n/a | |
Natural Resource Part. | Coal | 8 | 35.61 | 6.07 | 3,780 | 97.8 | 4.3 | 0.2 | 5.6 | 9.0 | n/a | |
NuStar Energy LP | Oil&Gas | 10 | 70.15 | 6.13 | 4,530 | 35.4 | 2.1 | 0.7 | 4.3 | 5.2 | n/a | |
ONEOK Partners LP | Oil&Gas | 6 | 83.15 | 5.48 | 8,470 | 225.2 | 1.3 | 3.0 | 3.9 | 6.9 | 5.3 | |
Plains All American LP | Oil&Gas | 11 | 65.47 | 5.85 | 9,240 | 48.4 | 0.3 | 3.6 | 4.6 | 7.8 | 7.5 | |
Spectra Energy Partners | Oil&Gas | 5 | 32.87 | 5.48 | 2,640 | 32.5 | 9.5 | 12.6 | 78.3 | n/a | n/a | |
StoneMor Partners LP | Cemeteries | 7 | 28.82 | 7.98 | 449 | 60.0 | 14.0 | 0.5 | 3.2 | 3.3 | n/a | |
Suburban Propane Par. | Propane | 13 | 57.78 | 5.90 | 2,050 | 47.5 | 2.1 | 2.7 | 5.7 | 6.6 | 4.9 | |
Sunoco Logistics Part. | Oil&Gas | 10 | 88.49 | 5.33 | 2,930 | 75.7 | 0.9 | 9.9 | 10.7 | 11.9 | n/a | |
Targa Resources Part. | Oil&Gas | 5 | 34.25 | 6.39 | 2,590 | 67.5 | 2.8 | 1.4 | 35.5 | n/a | n/a | |
TC Pipelines LP | TCLP | Oil&Gas | 11 | 54.26 | 5.53 | 2,510 | 61.4 | 0.6 | 2.4 | 4.7 | 5.0 | 4.9 |
Teekay LNG Partners | LNG Trans. | 7 | 38.08 | 6.62 | 2,060 | 92.8 | 4.6 | 3.9 | 6.1 | 29.6 | n/a | |
Transmontaigne Part. | Oil&Gas | 7 | 39.78 | 6.13 | 575 | 268.0 | 2.2 | 1.3 | 7.9 | 34.2 | n/a | |
Williams Partners LP | Oil&Gas | 7 | 51.86 | 5.42 | 14,520 | 49.8 | 0.1 | 4.4 | 9.1 | 78.0 | n/a | |
Averages for | 30 | MLPs | 8.43 | 52.09 | 5.59 | 6,402 | 75.4 | 2.9 | 4.5 | 12.2 | 15.6 | 7.7 |
Averages for | 447 | CCC Co's | 16.7 | 47.91 | 2.91 | 16,745 | 40.9 | 6.7 | 7.9 | 9.8 | 12.5 | 10.3 |
In addition, there are seven MLPs in the Appendix of companies with 4-year streaks of higher payouts:
Company | Symbol | Ex-Div |
Brookfield Infrastructure Part. | 2/24/11 | |
El Paso Pipeline Partners LP | 1/28/11 | |
Evercore Partners Inc. | 11/23/10 | |
Navios Maritime Partners LP | 2/7/11 | |
Penn Virginia GP Holdings LP | 4/29/10 | |
Teekay Offshore Partners LP | 5/5/10 | |
Western Gas Partners LP | 1/28/11 |
(The Ex-Dividend Dates listed are from their most recent increases.)
Summary
The MLP industry is the source of the fastest growth in the CCC universe in terms of participation and offers the highest yields and, in most cases, quarterly increases in the distribution. Most are Mid-Caps (between $2 and $10 billion), with a few Large Caps and Small Caps mixed in. MLP investors can diversify among oil and gas pipelines and providers of coal, propane, LNG (Liquified Natural Gas) transportation, and even an owner of cemeteries. Getting past the perception of a “nuisance factor” is the first hurdle for potential investors, and I count myself among them. Like many investors, I have investable cash in my retirement accounts and plan to buy one or more MLPs. I welcome comments from others who have been investing in MLPs, particularly in regards to dealing with K-1s, using retirement accounts, and the UBIT issue.
Next Up: The REITs
Disclosure: I plan to buy one or more MLPs, but not within 72 hours.
