One of the simplest ways to find high yield investments is to look at the master limited partnerships (MLP) in the energy sector. MLPs are required to pass through income to unitholders in the form of dividend distributions. Fortunately for investors, MLPs generally have much higher distributable cash flow than they have taxable income. This is a result of significant depreciation and other tax deductions, and is especially true of natural gas and oil pipeline and storage companies, which are the most common businesses to choose an MLP structure. Investors then receive higher cash payments than the amount upon which they are taxed, creating an efficient means of tax deferral (1). I have identified 2 MLPs that have strong operating performance with room to grow over the next 5 years.
Boardwalk Pipeline Partners (BWP) was formed in August 2005 by its parent, Loews, to acquire and develop natural gas pipelines and storage facilities. The partnership owns three interstate natural gas pipeline systems, comprising more than 14,000 miles of pipe between Texas and Ohio, and 11 underground natural gas storage facilities. Recent expansions give Boardwalk's pipelines direct access to several emerging shale plays, which will be key drivers of the master limited partnership's future volume growth.
Boardwalk derives about 80% of its revenue from reservation fees, so supply interruptions and volume shortfalls, such as those caused by hurricanes, have little impact on cash flow. The partnership's steady cash flows have supported continuous distribution growth since Boardwalk's 2005 IPO, and the MLP structure nearly eliminates corporate income tax exposure. Pipelines enjoy economic moats. Pipes are expensive to duplicate, and new ones are not built without regulatory approval.
BWP is currently trading at $25.22 with a fair value price target of $29.00 based on the discounted cash flow model. It has a dividend yield of 7.8% and the cash flow to grow its distributions by 4% per year based on future growth. BWP has an average revenue growth of 20% over the last 3 years. For a high yield MLP, you can buy up to the $29 fair value for a long-term hold.
TC Pipelines (TCLP) is a master limited partnership that holds some of the U.S. natural gas pipeline assets of TransCanada, the largest Canadian pipeline company. TransCanada is the general partner of the partnership and also owns about one third of TCLP's common units. TCLP's pipelines, for the most part in the northwest U.S., primarily transport Canadian gas into the United States.
TCLP's assets comprise a 50% stake in Northern Border, a 46% stake in Great Lakes, 25% stakes in GTN and Bison, and full ownership of the Tuscarora and North Baja pipelines, which have an aggregate capacity of 8.9 billion cubic feet per day. By focusing on pipelines and avoiding more-cyclical midstream operations, such as gathering and processing, TCLP maximizes cash-flow stability, which bodes well for steady distribution payments.
TCLP is trading at $47.16 with a fair value of $50.00. It has a dividend yield of 6.7%. Dividends have increased by 50% over the last ten years and are projected to increase about 3% in 2012. You can buy TCLP up to $50.00 for a long-term, high yield investment.