Income Investor Conundrum: Williams Partners

| About: Williams Partners (WPZ)
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Originally published on Nov. 12, 2014

Williams Partners (NYSE:WPZ) is one of the few Master Limited Partnerships that I included in any of my model Dividend Machine Portfolios. In April of 2011, WPZ qualified as a Dividend Machine.

As far as income goes, WPZ has done pretty well. Four years ago, our income was $2.81 per share per year. Now we get $3.714 per share per year, a nice increase.

But, Williams Partners has been troubled. Their dividend has increased but their stock price has not and that is because their earnings have not grown.

Growth at the cost of Income

Access Midstream Partners (NYSE:ACMP) is going to merge with Williams Partners. For each share of WPZ you own you will receive .8 shares of ACMP. It is anticipated that the dividend will decrease but growth will increase which eventually will lead to a resumption of dividend growth.

Seeking Alpha published a very well researched article on this ownership change. It should help you decide how to handle your position in WPZ.

ACMP, like WPZ, has demonstrated excellent dividend growth over the four years they have paid dividends. Their D/E ratio is less than WPZ's.

An Income Investor's Conundrum

Picking Dividend Machines is an excellent way to secure dividend income that increases. Oftentimes, this type of strategy is considered boring and one that does not need attention. WPZ is a good example of a Dividend Machine that needs attention.

The ownership change of WPZ will result in a reduction of our income and that is serious business to retired income investors. Even with the cut, the new shares may yield more than you can get from another, similarly safe investment. I say safe because while WPZ has had its troubles, you have not lost money if you bought it in 2011 at around $51.88. Today it trades at $51.18. Debt to Equity ratios are quite reasonable and pipelines are needed.

Covered calls might be able to make up the difference in the dividend cut but those will materialize only when others think this change is valuable.

I am going to hold for a while. Stay tuned!

Disclosure: Long WPZ.