Income Investing Part II: How to Get 12% Yields Today - Dylan Jovine

Writing About the Stock Market & Life Since 2003


Income Investing Part II: How to Get 12% Yields Today

Last week, we discussed the benefits of investing in Business Development Companies (BDCs) for investors seeking yield. Our hunt for yield in a low interest rate environment continues this week as we turn our focus to Master Limited Partnerships (MLPs).

An MLP is a limited partnership that is publicly traded on an exchange. An MLP combines the tax benefits of a limited partnership with the liquidity offered by publicly traded securities.

There are two types of partners in an MLP: general partners and limited partners. The general partners run the business. It’s their expertise that drives the operation. And in exchange for their expertise and effort, they get own a piece of the business.

The limited partners, in contrast, are the investors. They provide the money. In exchange for the investment, limited partners collect distributions from the MLPs cash flow.

What makes MLPs unique is that they aren’t required to pay corporate tax. Instead of paying taxes to Uncle Same, they get to pay that money to investors as distributions.

And that’s the major benefit of MLPs: they tend to offer attractive yields, especially compared to bonds. And because MLPs tend to emerge from stable, slow-growth industries, they tend to produce steady cash flow for long periods of time.

The MLPs I tend to focus on come from the energy industry. Companies that get oil and natural gas from the field to the refineries, holding tanks and gas stations would be a good example.

What I like about energy MLPs is that you get to participate in the oil business without exposure to the wild swings in commodity prices. That’s because most energy MLPs just own the pipelines and storage and transport facilities. They don’t take ownership of the actual commodity. They just move, store and process them.

This allows them to act like toll-bridge operators. For example, let’s say you discover shale oil in the Bakken Formation in North Dakota. That’s great. But how are you going to get it to the storage tanks you rented in Pakota, Illinois so you can sell it? You may use the Dakota Access Pipeline developed by Energy Transfer (SYM: ET). Energy Transfer is a $40 billion company with a nice 8.25% yield.

Here are a 3 more high-yield partnerships for you to consider:

Capital Product Partners L.P. (SYM: CPLP) – 12.02% Yield
Capital Product Partners L.P., a shipping company, provides marine transportation services in Greece. It transports a range of cargoes, including crude oil; refined oil products, such as gasoline, diesel, fuel oil and jet fuel; edible oils; chemicals, such as ethanol; and dry cargo and containerized goods under short-term voyage charters, and medium to long-term time and bareboat charters. As of December 31, 2017, the company had a fleet of 36 vessels, which consisted of 4 Suezmax crude oil tankers, 21 medium range tankers, 10 post-panamax container vessels, and 1 capesize bulk carrier. Capital GP L.L.C. serves as the general partner of the company. Capital Product Partners L.P. was founded in 2007 and is headquartered in Piraeus, Greece.

NGL Energy Partners (SYM: NGL) 11.12% Yield
NGL Energy Partners LP, together with its subsidiaries, engages in the crude oil logistics, water solutions, liquids, retail propane, and refined products and renewables businesses. The Crude Oil Logistics segment purchases crude oil from producers and transports it to refineries for resale at pipeline injection stations, storage terminals, barge loading facilities, rail facilities, refineries, and other trade hubs; and provides storage, terminaling, trucking, marine, and pipeline transportation services. The Water Solutions segment is involved in the treatment and disposal of wastewater generated from crude oil and natural gas production operations; disposal of solids, such as tank bottoms, drilling fluids, and drilling muds, as well as performs truck and frac tank washouts; and sale of recovered hydrocarbons. The Liquids segment supplies natural gas liquids to retailers, wholesalers, refiners, and petrochemical plants in the United States and Canada through its 21 terminals, as well as offers terminaling and storage services. The Retail Propane segment sells propane, distillates, and equipment and supplies to end users consisting of residential, agricultural, commercial, and industrial customers, as well as resellers. The Refined Products and Renewables segment markets gasoline, diesel, ethanol, and biodiesel products; and purchase and delivers refined petroleum and renewable products.

Sunoco LP (SYM: SUN) 10.68% Yield
Sunoco LP, together with its subsidiaries, engages in the distribution and retailing of motor fuels in the United States. The company operates through two segments, Fuel Distribution and Marketing, and All Other. The Fuel Distribution and Marketing segment purchases motor fuel from independent refiners and major oil companies and supplies it to independently operated dealer stations, distributors and other consumer of motor fuel, and partnership operated stations, as well as to commission agent locations. The All Other segment operates retail stores that offer motor fuel, merchandise, foodservice, and other services that include car washes, lottery, automated teller machines, money orders, prepaid phone cards, and wireless services. It also leases and rents real estate properties. Sunoco GP LLC serves as the general partner of the company. The company was formerly known as Susser Petroleum Partners LP and changed its name to Sunoco LP in October 2014. Sunoco LP is headquartered in Dallas, Texas.

 (To learn more about the tax advantages of investing in MLPs you can visit here.)

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Dylan Jovine
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