3 money-minting MLPs for dividend investors

The best income stocks offer big payouts, decent share appreciation and rock-solid stability. Don't miss out on these energy investments.

By InvestorPlace May 17, 2013 9:17AM

Natural gas plant © Kevin Burke CorbisBy Jeff Reeves

We all know about the current dividend investing trend. With CDs and Treasuries yielding less than 2%, your best shot at income is to seek out stable dividend payers.

The best income stocks offer big dividends, decent share appreciation and rock-solid stability. And one of the best places to look for that triple-treat of a dividend stock is in the master limited partnership arena.

Master limited partnerships, or MLPs, are quirky investments. They have special tax rules, offering "distributions" instead of dividends to its "partners" or "unitholders." But don't let the jargon fool you. MLPs essentially are the same as dividend stocks, only their special corporate structure ensures that the vast majority of any profits are delivered right back to shareholders. Er, I mean "unitholders." You get the idea.

Anyway, most MLPs exist in the energy arena, since the special partnership structure is designed for tax benefits in this capital-intensive but economically crucial sector. The thought is that the IRS can afford to cut these guys a break -- so long as they return the lion's share of profits to shareholders -- since we need pipelines and other energy infrastructure.

It's a win-win -- companies get a favorable tax structure and investors get big-time payouts in businesses that have almost no competition and very robust baseline demand.

So what are the top MLPs out there? Here are three to consider.

Cheniere Energy Partners LP

Dividend Yield: 6%

Cheniere Energy Partners LP (CQP) is a great example of the difference between conventional energy stocks that might be suffering and related MLPs that are thriving. In the past 12 months, parent company Cheniere Energy Inc. (LNG) -- a conventional for-profit energy stock -- is down about 80% and has been bleeding cash since before 2008 thanks to the crash in natural gas prices.

However, while Cheniere Energy Inc. is painfully unprofitable, the partnership with the same name is thriving -- up more than 17% in the last year, with a current yield of 6%.

Why? Well, primarily because  CQP is not affected by natural gas prices. It gets paid simply by volume as it passes natural gas through its Sabine Pass hub just east of Houston. It is one of a precious few deepwater ports along the Gulf Coast suitable for importing and exporting liquefied natural gas.

Considering the massive domestic supply of natural gas and the fact that the fuel burns cleaner than coal or oil, this has big long-term potential. A boost in energy exports would be a boon to CQP -- and to distributions of this MLP.

If you like this pick, just be careful to use the correct symbol -- CQP for the partnership.

Enterprise Products Partners LP

Dividend Yield: 4.3%

Enterprise Products Partners LP (EPD) is literally the dividend stock that keeps on giving. Enterprise has a track record of 35 straight quarter-over-quarter increases to its distributions. You'll have to go all the way back to 2004 to find a dividend that didn't move up!

The increases are modest, but powerful over time. Distributions have increased 34% since the beginning of 2008 and 94% since 2003. This is the kind of info that long-term income investors salivate over.

The icing on the cake is the MLP story behind Enterprise Products. This natural gas and oil company is a leader in so-called "midstream" infrastructure in the deepwater of the Gulf of Mexico. The "upstream" part is the actual production of energy by drilling companies and oil service stocks. The "downstream" activity involves delivering natural gas to end-users. EPD is the middleman, taking a cut along the way.

As you can see, it's a profitable business. And because transporting gas and oil like this is a capital-intensive business, there is no competition or risk of upstart competitors eating Enterprise's lunch anytime soon.

Perhaps the most exciting part of Enterprise Products is its 1,230-mile Appalachia-to-Texas Express Pipeline project. The ATEX Express, as it's called, will connect natural gas operations in and around the Marcellus/Utica Shale region of Pennsylvania and upstate New York to energy processing facilities (and customers!) in energy-hungry regions to the south. It's a long way for gas to move, but considering the abundance and affordability of domestic natural gas -- and not to mention the political will to wean America off foreign oil -- the ATEX pipeline could be an impressive opportunity in the years ahead.

Plains All-American Pipeline LP

Dividend Yield: 4%

Plains All-American Pipeline LP (PAA) makes its money via storage, terminalling and marketing of crude oil and other energy products. But the biggest competitive advantage to this company is its partnership with top players in shale oil fields. From the Permian Basin to the Bakken Shale to Eagle Ford and Mississippian Lime, Plains is connected to them all.

Of course, while Plains All-American does not produce oil and is not exposed directly to commodity prices, it's worth noting that the more costly nature of shale oil (as opposed to more easily extracted oil from conventional wells) can severely limit production from these regions. If oil prices are too low -- below $80 or so -- producers are basically breaking even on their output, so there's no incentive to pump like crazy. Thus less fuel flows through PAA distribution facilities, resulting in lower revenue.

However, that risk hasn't been a factor as of late as crude prices have remained firm. Consider that PAA is up 45% in the last 12 months on share price alone!

And on the income side of things, Plains has raised distributions 15 quarters in a row (accounting for a recent split) and hasn't seen a quarter-over-quarter reduction in over 12 years, dating back to early 2000.

If crude oil demand increases and if prices firm up, boosting shale oil production, the numbers could be even more impressive in the years to come.

Jeff Reeves is the editor of InvestorPlace.com and the author of "The Frugal Investor's Guide to Finding Great Stocks." Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

More from InvestorPlace

May 17, 2013 11:13AM
are designed to please,
with their golden yield,
while tearing up your field.
But what more can one do...
since subpar interest is no good for you.

Just buy some!

May 17, 2013 11:50AM
Benjamin Regal, I have one word for you, son...

ETFs !!!

May 17, 2013 3:04PM
MLP's are not for the unwary.  Especially those who are unaware of the tax implications of investing in them and the tax laws governing reporting the data on the K-1 that the investor will receive .  First of all the lie that these are dividends. For tax purposes they are not dividends but partnership distributions which are not taxable but do reduce the investor's basis.  Basically your getting back your investment.   
May 17, 2013 1:52PM
If you put them in your IRA you don't have to worry about the K-1.
May 17, 2013 11:36AM
I`d rather owm MLP`s in a mutual fund rather than track down the K-1 forms.
May 17, 2013 2:16PM

I've always wanted to play around with the MLPs but do take the easy route and go with 4Loveof Money's ETFs or should I be more selective? Hmmm...

May 17, 2013 12:33PM
Are you kidding me?  High prices and low dividend/distribution yields at or below 4% are NOT what I am looking for in any stock, whether it be an MLP or something else.  I prefer BWP, EROC, & OKS.  OKS has increased their distributions for I don't know how many quarters, and committed to increasing them by about 25 to 50 cents EVERY quarter for at least the next couple of years.
May 17, 2013 11:29AM
Is this guy completely nuts?  Let's see: DUA returns about 6.7% plus some upside. So does AEF. So do  lot more preferreds taxed at 15%.  So what's the big deal about 4 on something without upside potential?  Got to be kidding.
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