Make Lotsa Profits With MLPs: Focus On 'Yield On Cost'

Includes: CLMT, MMLP, MMP
by: George Schneider

Make Lotsa Profits with MLPs. Most new, young investors just don't get it. They're constantly swinging for the fences on every pitch, seeking that elusive home run. Alas, it doesn't come very often, if at all.

Maybe it takes living through a few market crashes to learn the hard way. I know; that's how I learned to pursue the art of hitting singles, consistently through dividend/distribution growth investing. The main goal here is growing your income stream from a cantor into a gallop from your stable of investments. Capital growth on the value of the portfolio becomes just the icing on the cake over the long term.

Master Limited Partnerships, or MLPs, are publicly listed companies, mostly found in the energy sector. They pay no corporate income taxes because they pay out a minimum of 90% of their profits to unit holders who then pay taxes on their distributions.

However, much of what you, as a unit holder, receive in distributions is tax advantaged because much of it is considered a return of capital.

Calumet Specialty Products Partners LP (NASDAQ:CLMT) produces and sells specialty hydrocarbon and fuel products in North America. It operates in two segments, Specialty Products and Fuel Products.

CLMT has grown its distribution from $.30 per quarter, to $.65 per quarter over a span of 6 ¾ years and more than doubled its payout to investors in a very short period of time. It has a current yield of 6.9%.

Dividend Growth Rate Calculation

Beginning Year Annual Dividend $

Ending Year Annual Dividend $

Number of Years

Calumet has demonstrated a dividend growth rate of 12.14% over this time period.

Using the rule of 72, it can be seen that if CLMT continues to grow its distribution at this rate, if you invested today, you would double your distribution payout and yield on your cost in just 5.93 years.

72/12.14= 5.93 years

Magellan Midstream Partners LP (NYSE:MMP) is another MLP to consider. Magellan Midstream engages in the transportation, storage, and distribution of petroleum products in the United States. The company's petroleum pipeline system transports petroleum products, such as gasoline, diesel and aviation fuel, heating oil, crude oil, and liquefied petroleum gas for independent and integrated oil companies, wholesalers, retailers, railroads, airlines, and regional farm cooperatives.

Magellan Midstream has grown its distribution from $.073 per quarter, to $.50 per quarter over a span of 11 ¾ years. Its payout to investors has multiplied by 7 times, from April, 2001 to February, 2013. It sports a current yield of 7.8%.

Magellan has demonstrated a dividend growth rate of 17.79% over this time period.

Again, using the rule of 72, you can see that if MMP continues this same rate of growth in its distribution, your investment today would double your distribution payout and yield on cost in just 4 years, and double again every 4 years after that.

72/17.79= 4 years

A third MLP exhibiting solid dividend growth over the years is Martin Midstream Partners LP (NASDAQ:MMLP). Martin Midstream collects, transports, stores, and markets petroleum products and by-products in the United States Gulf Coast region. Martin Midstream Partners L.P. was founded in 2002 and is based in Kilgore, Texas.

From January 2003 to February 2013, its distributions over the past 10 1/3 years have grown at the rate of 9.61%, from a quarterly payout of $.308 to $.77 currently. It has a current yield of 8.2%.

Employing the rule of 72 once again, if MMLP continues to grow its distribution at this rate, you would double your distribution payout and yield every 7 1/2 years on today's investment!

72/9.61=7.5 years

Current Data Points

Dividend Current Current
Stock Growth Annual Yield
Rate Distribution
CLMT 12.14% $2.60 6.90%
MMP 17.79% $2.00 7.80%
MMLP 9.60% $3.08 8.20%

Projected Time to Double Your Yield and Income

$100,000 investment in each name

Current Years to Projected Projected
Stock Income Double Income after Yield on
Doubling Cost
CLMT $6,900.00 5.93 $13,800.00 13.80%
MMP $7,800.00 4 $15,600.00 15.60%
MMLP $8,200.00 7.5 $16,400.00 16.40%

It is apparent that making investments in solid, high quality MLPs such as these at decent current yields ranging from 6.9% to 8.2% quickly leads to explosive yields on your original cost in very short time periods. It has been demonstrated here that it is possible to double your yield and income stream in as short as 4 years to 7 ½ years' time.

Each of these companies has demonstrated the ability to consistently share its large and growing stream of income with investors over sufficiently long periods of time.

As long as they continue growing their payouts at their respective historical rates, investors in these units can count on continued concomitant growth in their own income streams for the foreseeable future. Such growth will keep young and older investors' alike way ahead of inflation. Thus, the income obtained will retain its buying power.

Yields on cost of 13.8%, 15.6% and 16.4%, projected to double in only a few short years have been demonstrated. Annual income on just these 3 stocks alone can climb from $22,900 to $45,800, bringing your blended portfolio yield up to 15.27% as long as these companies' profits continue to flow in.

Capital Gains and Reinvestment of Distributions

Up to this point, we haven't even discussed the impact of capital gains on the portfolio and what effect the reinvestment of distributions would have. That will be left for a future article, since the point of this article was to focus solely on growing the income stream.

Suffice it to say, for now, that if distributions are reinvested in distribution growers such as these, the income stream truly explodes and doubling of income will be expected in much shorter periods than detailed here.

Along with the continuing recovery and expansion of our economy, transportation and storage of fossil fuels will increasingly find greater demand and the price of our MLP stocks will commensurately reflect this in higher quotes. The capital gains to be reaped from this as well as from multiple expansion will make for some very slick icing on our cakes.


Who needs to bat homers when you can have performance like this hitting consistent singles? Focus on your yield on cost and make lotsa profits!

Disclosure: I am long CLMT, MMP, MMLP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.