Speaking of the balance sheet, debt is another really important factor MLP investors need to consider. After all, most MLPs that end up cutting their distributions do so not just because their DCR ratios are under one, but also because their debt burdens become unsustainable. This can result in a liquidity crisis in which the risk of losing an investment-grade credit rating and having to obtain new or refinanced debt in the much higher cost junk bond market can force management to cut the distribution so that more DCF can be used to pay back creditors.
A conservative approach to debt not only helps ensure safe payouts, but also provides MLPs with plenty of access to cheap debt capital they can use for growth projects. Most MLPs have lower Dividend Safety Scores reflecting their high debt burdens, dependence on raising capital, and elevated payout ratios.
There is not much margin for error. Our website makes it easy to find an MLP's DCF per share over the trailing month period, as well as what analysts are projecting over the year ahead. That allows you to see whether or not today could be a reasonable time to buy an MLP for income. Here is a look at Magellan Midstream Partners' dividend yield over the last five years. However, if you have the time and interest in following this industry, some MLPs can offer a long-term method of generating substantial income and unique tax advantages as part of a well-diversified dividend portfolio.
The key, as with all investing, is to be highly selective about which MLPs to entrust your money to. However, if you focus on the metrics that matter, you can help maximize your chances of avoiding value traps, such as those MLPs that are likely to cut their payouts in the future. Living off dividends in retirement is a dream shared by many investors.
We have all been there. High dividend stocks are popular holdings in retirement portfolios. Learn about the 20 best high yield stocks for dividend income. Download a list of all of Berkshire Hathaway's dividend-paying stocks, including their yields and Dividend Safety Scores. See the complete dividend aristocrats list. Based on the forecast Lockheed provided in August, Shares of telecommunications companies like Verizon have been under pressure this year following record spending in the C-Band MLPs are situated to take advantage of cash flow because they are required to distribute all available cash to investors.
They can also help reduce the cost of capital in capital-intensive businesses, such as the energy sector. The first MLP was organized in However, by , Congress effectively limited the use of them to the real estate and natural resources sectors.
These limitations were put into place out of a concern over too much lost corporate tax revenue; MLPs do not pay federal income taxes. The MLP is a unique hybrid legal entity that combines elements of two business structures—a partnership and a corporation. First of all, it is considered the aggregate of its partners rather than a separate legal entity as is the case with a corporation. Second, it technically has no employees.
The general partners are responsible for providing all necessary operational services. Like a partnership, an MLP issues units instead of shares. However, these units are often traded on national stock exchanges. The availability of exchanges offers significant liquidity; traditional partnerships cannot offer this level of liquidity. Because these publicly traded units are not stock shares, those who invest in MLPs are commonly referred to as unitholders, rather than shareholders.
Those who buy into an MLP are also called limited partners. These unitholders are allocated a share of the MLP's income, deductions, losses, and credits. MLPs have two classes of partners:. An MLP is treated as a limited partnership for tax purposes. A limited partnership has a pass-through, or flow-through, tax structure. This taxing method means that all profits and losses are passed through to the limited partners. In other words, the MLP itself is not liable for corporate taxes on its revenues, as most incorporated businesses are.
Instead, the owners—or unitholder investors—are only personally liable for income taxes on their portions of the MLP's earnings. This tax scheme offers a significant tax advantage to the MLP. Profits are not subject to double taxation from corporate and unitholder income taxes. Standard corporations pay corporate tax, and then shareholders must also pay personal taxes on the income from their holdings.
Further, deductions, such as depreciation and depletion, also pass through to the limited partners. Limited partners can use these deductions to reduce their taxable income. Qualifying income includes income realized from the exploration, production, or transportation of natural resources or real estate.
This definition of qualifying income reduces the sectors in which MLPs can operate. Quarterly distributions from the MLP are not unlike quarterly stock dividends. But they are treated as a return of capital ROC , as opposed to dividend income. So, the unitholder does not pay income tax on the returns. Given its conservatism and 8. One of the hallmarks of being a solid MLP is having a strong partner. That's because partners are able to "drop-down" assets into the MLP and benefit from the distributions paid back.
If you have a larger partner with plenty of pipelines and facilities, you can keep this process going for quite a while and build a big base for expansion. MPC originally set up MPLX to hold the pipelines that feed its own refineries and take away refined petroleum products.
That segment still produces the lion's share of the firm's earnings — about two-thirds in the latest quarter. The rest comes from its natural gas assets picked up back in , which have been a game changer for MPLX. With these, the firm owns and operates several natural gas gathering systems that tie into a variety of crackers and processing facilities.
These natural gas liquids NGLs like ethane and propane have added value and can be processed further into chemicals and plastics. It's here that MPLX has seen the biggest driver of growth. Tied to commodity prices, these NGLs and cracking facilities have added an incremental boost to MPLX's bottom-line since their addition.
With natural gas and oil prices rising, they are doing it again. Marathon cited higher prices and lower operating expenses for the jump.
What gets juicy for investors is that MPLX was already covering its payout. For , the firm's coverage ratio averaged a comfortable 1. With the added boost, Marathon was able to increase its coverage to 1. That suggests its current 9.
The emphasis comes from the fact that some midstream firms are truly behemoths. ET owns and controls more than 90, miles worth of pipelines and associated energy infrastructure crisscrossing 38 U. That size and scope has been a feat of engineering in of itself.
This is even true today. ET controlled the general partner interests and owned units in limited partners LPs , even as some of those LPs were still publicly traded. Energy Transfer historically traded at a discount to many of its peers solely because its structure was so complicated.
Since , ET has undergone a major transformation with regards to structure. It absorbed many of its smaller public MLPs into its larger corporate organization, merged ETE and ETP together, and underwent several operational simplification efforts. Those willing to focus on ET's current leadership position will be well-rewarded. Thanks to its size and scope, Energy Transfer remains a cash flow machine. And with expansion projects and the ENBL acquisition to help boost cash flows further, ET's dividend might be as good as gold.
EPD is just slightly smaller at around 50, miles worth of pipelines covering natural gas, crude oil, refined products and NGLs. It owns a variety of terminals and ports, barges, coal depots … you name it. So, it's far from a small fry when it comes to energy infrastructure.
That massive base has provided EPD with stability over the years with 22 straight years' worth of dividend payments since its initial public offering IPO. This stability even came during the pandemic, when Energy Product's coverage ratio was a juicy 1. The IRS charges the return of capital against your cost basis. That return of capital is taxed at your ordinary tax rates. So, in short, to maximize the value of an MLP, you want to hold for years, and years, and years to push off recapture as long as you can.
What are your thoughts on MLPs? Do you own any in your portfolio? A value investor and blogger who enjoys discovering the hidden gems available on the public markets. Other Options. Get Out Of Debt. How To Start. Extra Income. Build Wealth. Credit Tools.
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