During the course of their research, most income-oriented investors eventually come across a special form of corporation known as a master limited partnership, or MLP. These companies stand out because of big annual payouts that are typically double or even triple that of 10 year U.S. Treasury bonds.
But exactly what is a master limited partnership, and are MLPs right for your portfolio?
In a nutshell, an MLP is a publicly traded company structured as a partnership in order to achieve big tax breaks. In exchange for the tax breaks, the partnership must pass the vast majority of profits directly to investors instead of keeping it within the company itself. This structure was designed specifically for oil or gas operations that require a lot of capital, such as building a pipeline that is hundreds of miles long, in order to incentivize investment in U.S. energy infrastructure.
There are generally two kinds of investors in these partnerships. The first is a limited partner, which is an individual investor who purchases shares of an MLP on the stock market. The second is a general partner, typically a larger energy company, who is responsible for managing the MLP’s operations in exchange for a chunk of the partnership’s overall profits.
[See: 7 Great Ways to Buy Energy Stocks.]
Obviously, individual investors fall in the former group — one of a number of partners who each get a share of the profits, based on how they have invested. And as such, it’s up to you as an individual to research the best companies that offer reliable profits they can consistently pass on to you.
Here are a few such companies worth considering if you’re interested in MLP investing.
Enterprise Products Partners (EPD). Pipeline operator Enterprise Products Partners is a great example of the income potential in MLPs. While exploration and production companies have to take on big debts on the hopes that they will strike enough oil to turn a profit, EPD is a middleman between those producers and the marketplace.
In addition to the reliable revenue stream of its business, EPD also boasts an impressive scale that should be attractive to low-risk investors. The energy company operates more than 49,000 miles of pipeline, 260 million barrels of crude oil storage and another 14 billion cubic feet of natural gas storage.
Currently, Enterprise Products yields 6.6 percent, and has a strong track record of raising distributions over time, too. It’s this constant and growing payout that is the hallmark of a good MLP investment.
Phillips 66 Partners (PSXP). Many of the most successful MLPs have been created by large energy companies that want the benefit from the unique structure of this kind of business. It’s often a win-win for both the primary stock that is the general partner as well as for the new partnership that has been created, and that’s exactly the case with Phillips 66 Partners and its corporate parent ConocoPhillips ( COP).
Spun off in 2013, Phillips 66 Partners consists of pipelines, terminals and other midstream assets that help power the broader ConocoPhillips business. The tax benefits and a generous yield of about 5 percent kicked back to COP as a major investor make it great for the parent, but the MLP benefits nicely. Consider PSXP received more than $2.3 billion in projects from its parent company last year alone.
Phillips 66 Partners has raised its distribution for 16 consecutive quarters since entering public markets, and is clearly committed to delivering consistent income to its shareholders.
Western Gas Partners (WES). Western Gas Partners is another high-yield MLP to watch in part because of a strong general partner. WES was born out of the extensive pipeline network owned and operated by independent energy producer Anadarko Petroleum Corp. ( APC).
[See: Oil ETFs: 8 Ways to Invest in Black Gold.]
What makes Western Gas really attractive, though, is where those pipelines and processing centers are. The MLP has major operations that serve the Marcellus and Eagle Ford shale regions — two of the epicenters of American fracking and horizontal drilling. There’s no risk that those regions are going to stop cranking out crude anytime soon — and with a tight connection to Anadarko’s operations in the regions, Western Gas is sure to see stable business for many years to come.
And with a more than 7 percent yield, investors have a lot of reason to stick around for the long term.
Tallgrass Energy Partners (TEP). Tallgrass Energy Partners is another great example of a “midstream” play that operates as middleman between explorers and those who process and sell energy products.
Tallgrass owns some of the most important pieces of energy infrastructure in the Rocky Mountains and Midwest of the United States, including infrastructure that serves an important oil hub in Cushing, Oklahoma.
This network of pipelines insulates Tallgrass from volatility in energy prices because it is simply a toll-taker of sorts, charging other companies to use its network in and around Cushing. There is a small amount of ebb and flow in output, but most smaller companies cannot afford to curtail production too much or else they won’t generate enough revenue to keep the lights on.
As proof of the stability and income potential, consider that since its 2013 IPO, Tallgrass has seen its payouts soar from 14 cents to 93 cents quarterly. It now yields more than 8 percent annually.
Andeavor Logistics (ANDX). Andeavor Logistics was created as part of refiner Tesoro Corp. to structure the energy giant’s pipeline and storage assets. The energy giant was supplying everything from gasoline for automobiles to oil for heating to even jet fuel, and had a ton of related infrastructure as a result.
As previously mentioned, that close relationship with a larger energy company can drive consistent revenue. But ANDX stands out because it leveraged its consistent cash flow into a growing business that has expanded beyond its origins as a spin-off of Tesoro.
Andeavor has expanded into oil products and natural gas pipelines, storage tanks and even trucking-related assets. As a result, net income has soared in recent years well beyond what this partnership could achieve if it was just resting on its laurels and relying on its parent.
[See: The Best Energy Stocks to Buy for 2017.]
This high-yield MLP has grown its payout by 60 percent in the three years since it started paying out distributions in 2014, showing it’s eager to share its success with investors.
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5 High-Yield MLPs to Buy Now originally appeared on usnews.com
