MLP Stock List: Earn Reliable Income from These Energy Partnerships

Best MLP Stocks 2017

Master limited partnerships, or MLPs, have been one of Wall Street’s best-kept secrets. A lot of them offer much higher yields than regular stocks while also providing a level of dividend safety. Because MLP stocks are not really the trending tickers nowadays, information about them can be limited. In this article, we are going to take a look at the comprehensive list of MLPs trading in the U.S. stock market and some of the ways to identify the best MLP stocks for 2017.

Investing in MLP Stocks

Very often, income investors have to choose between two sets of stocks: those with a high dividend yield, or those with high dividend safety. This is because the prices of blue-chip companies known for their dividend safety have already been bid up, and since dividend yield moves inversely to stock price, their yield is no longer impressive. Is there a way to earn above-average and yet reliable income in today’s stock market? Well, MLPs are certainly a group of stocks worth considering.

Before we go over the list of MLPs trading in today’s market, let’s first look at what an MLP is and where it came about.

MLPs are limited partnerships that are traded on stock exchanges. Investors can buy and sell MLPs just as they would regular stocks. The vast majority of MLPs are in the oil and gas business. However, they are quite a bit different from regular oil and gas companies.

The first main difference is in taxes. On October 22, 1986, President Ronald Reagan signed the Tax Reform Act. The act was known for reducing certain tax privileges while cutting overall taxes and lowering rates for businesses and families. But there was another, lesser-known result of this legislation. In order to encourage domestic energy development, the legislation allowed a certain group of energy infrastructure companies to pay no corporate tax. The tax benefit sparked the much-needed capital investments in America’s energy sector and led to the creation of MLPs. (Source: “General Explanation Of The Tax Reform Act Of 1986,” Joint Committee on Taxation, May 4, 1987.)

In order to get the tax benefits, MLPs must generate at least 90% of their income from qualifying sources. These sources include the production, processing, storage, and transportation of natural resources and minerals. Today, most of the MLPs are involved in the oil and gas business.

Other than paying no taxes at the corporate level, MLPs also stand out in terms of distributions. One of the reasons why investors are willing to provide capital to these partnerships is their mandate. MLPs are required by law to distribute almost all their available cash to unitholders in the form of quarterly cash distributions. Furthermore, a lot of MLPs are growth-oriented. Their goal is to provide investors with a steadily increasing stream of income. Looking back, there are quite a few MLPs that have been consistently growing their payout.

There is also a difference in terminology. Usually, when we talk about stocks, we are referring to common shares of publicly traded companies. MLPs, on the other hand, are structured as limited partnerships. As a result, when an investor invests in an MLP stock, they are buying common units of the partnership and become a unitholder, rather than a shareholder. Moreover, dividends paid by MLP stocks are called distributions.

Types of Master Limited Partnerships

As you can see from the list near the end of this article, there are several types of master limited partnerships. The vast majority of MLPs come from the oil and gas sector. Within that sector, the midstream oil and gas segment is known for having the largest number of MLPs. They are involved in the gathering, processing, compression, transportation, and storage of oil and gas.

Although most oil and natural gas MLP stocks are in involved in midstream services, there are also upstream MLPs and downstream MLPs. Upstream MLPs are involved in the exploration and production of oil and gas, while downstream MLPs are in the business of refining, marketing, and distributing products derived from crude oil and natural gas.

Other than upstream, midstream, and downstream oil and gas partnerships, MLPs may also engage in the business of propane distribution, oilfield services, and marine transportation.

Outside of oil and gas, there are more than a dozen MLPs coming from coal and other natural resources sectors. Furthermore, there are real estate businesses and investment entities structured as MLPs. In total, over 130 MLPs are currently trading on U.S. stock exchanges.

Best MLP Investment

MLPs are income investments. Therefore, the No. 1 reason to invest in MLPs is to collect their distributions.

The role of dividends today doesn’t seem to be as important as before. The average dividend yield of S&P 500 companies is now below two percent, which is less than half of its historical average. MLPs, on the other hand, have kept dishing out oversized distributions. Many MLPs provide distribution yields north of five percent.

Of course, a high dividend yield shouldn’t be the only requirement for income investors. Even in today’s market, there are plenty of stocks with ultra-high yields. But those stocks are rarely good investments because of their dividend safety, or rather the lack of it. As long-term investors, buying an ultra-high-yield stock before its dividend is cut can turn out to be a very expensive lesson.

So, how should investors go about when it comes to MLP investing? Well, in my opinion, there is one group of MLPs that could be solid enough to justify as long-term investments: midstream MLPs. To be more specific, I’m looking at pipeline MLP stocks.

Best MLP Dividend Stocks

One of the most important factors to take into account when considering MLPs is commodity price risk. As we know, most MLPs come from the oil and gas sector. If you have paid any attention to what’s going on in the markets in recent years, you would know that the situation in the oil and gas sector is far from sunshine and rainbows. Due to the downturn in oil and gas prices, some energy companies have fallen deep into the doldrums. Quite a few have slashed their dividends, and some have gone out of business altogether.

However, not all investors have given up on the energy sector. Investments such as energy stocks, oil ETFs, and energy MLP stocks still have an audience.

For instance, midstream MLPs, and particularly pipeline MLPs, have proven themselves to be the more resilient type. And that’s in part due to the nature of their business.

You see, energy companies use pipelines to move energy products from point A to point B. Suppose an MLP owns and operates oil pipelines. An oil company would tell the MLP that it has a certain number of barrels to transport and would pay the MLP a set fee per barrel. Because the MLP is not drilling new wells, it doesn’t have to worry too much about the price of oil.

In other words, pipeline MLPs make money by operating what are essentially energy toll roads.

Of course, if a business is lucrative, chances are competitors will enter the market. And with increasing competition, profitability would decline. So, has that affected pipeline MLPs’ business?

As it turns out, pipeline MLPs don’t really need to worry about competition that much. First, building pipelines requires a significant amount of capital. Second, even if you have the money, getting the regulatory approvals that are necessary to build a pipeline is not an easy process. Furthermore, if a pipeline is already in place, it’s almost certain that the authorities won’t allow someone to lay a competing line. For one thing, it just doesn’t make economic sense to have two sets of energy infrastructure doing the exact same thing. It’s similar to electricity distributors: in each area, one company is responsible for all the business. Therefore, pipeline MLP stocks are essentially monopolies.

In the U.S., the vast majority of oil and natural gas products are transported through pipelines. Companies can also use trucks and rail cars, but when it comes to efficiency, these methods of transportation simply cannot compete with pipelines.

So, pipeline MLPs make solid money, but what about expenses? Well, building a pipeline is obviously an expensive endeavor. But once the pipeline is put in place, the cost of maintaining it is small compared to the amount of cash it generates. Therefore, pipeline MLPs can distribute most of the cash they earn to investors.

MLP Stocks List

The Bottom Line on MLP Stocks

MLPs can be solid income generating instruments. But just like any other type of stocks, they do carry a degree of risk. That risk may come from the worsening of business conditions to the point where an MLP can no longer meet its distribution obligations. So even though some MLP stocks have proven track records of delivering consistent payouts, they are not risk-free. Before investing in any of them, it’s important to check that the partnership can generate enough recurring business to cover its distributions, and that it doesn’t have a capital expenditure plan so aggressive that it may affect its payout to investors.