Top High Yielding MLPs

Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

High yields can be found in MLPs (Master Limited Partnerships). Usually structured around a particular qualified business (often energy-related), MLPs do not pay a corporate income tax, as they pay pass profits on directly to the shareholders (technically unit-holders) on a quarterly basis. These payments, however, are not technically dividends--they are distributions, and as such have a special tax status. Unlike dividends, a large percentage of these distributions are considered to be "return of capital," and therefore you only pay taxes on them once you sell the stock. This allows for interesting tax-deferral strategies.

The following three MLPs pay generous distributions and are well-regarded by most analysts. Would it be wise to initiate a position in any of them?

Eagle Rock Energy Partners (NASDAQ: EROC) : The company is involved in the production of mostly oil and some natural gas, and owns 8,000 miles of gathering pipelines in the Southern United States, as well as 21 gas processing plants.

  • From a valuation standpoint, the company does not have a current P/E ratio, as earnings per share were negative last quarter. However, future P/E stands at 30.32.
  • Average analyst target price is $10.30, which implies a potential upside of 9.57% from current prices. Recent price targets, however, have been higher than the current average of $10.30. Mean current recommendation is 2.40 (with 1 being strong buy, and 5 a strong sell).
  • The distribution is $0.88/share, which works out to a very attractive 9.36% yield.
  • My take: Value-wise this stock is not very attractive: valuation ratios are either high or nonexistent. If the company is not able to return to profitability this year, then this stock will probably underperform. However, future prospects are good: a recent partnership with BP for gathering and processing in the Texas Panhandle should help the company's cash flow, and a good contract strategy should keep the company relatively hedged from further natural gas price declines. With good growth prospects and attractive yields, investors should consider buying this MLP.

Mid-Con Energy Partners (NASDAQ: MCEP) : The company is engaged in the acquisition, development, and production of oil properties in the United States (mostly in Oklahoma and Colorado). Known for its water-flooding technique, the stock has risen 20% YTD, but still retains attractive valuation ratios and distribution yields.

  • While currently trading at a not-so-cheap P/E of 18.36, the forward P/E is a more attractive 11.14.
  • Analysts are generally bullish on the stock. They have an average price of $25.33 (which implies a potential price upside of +13.08%), and an average recommendation of 1.40.
  • With the recent price surge, the yield has dropped to 8.66%. While still a very high figure, the yield was in the double digits in December. At any rate, MCEP pays an attractive distribution of $1.94/unit.
  • My take: While not necessarily a value play, MCEP is certainly a growth play. Rapid increases in production, possible joint ventures, ample access to capital, smart hedging strategies, and attractive yields make this a stock definitely worth considering.

 Northern Tier Energy (NYSE: NTI) : This partnership is an energy company with refining, retail, and some pipeline operations in the Great Plains and Midwest area (PADD II region).

  • It currently has a very attractive P/E of just 5.83. Future P/E is slightly higher, at 8.13.
  • It has an average analyst target price of $27 (implying a potential 4.49% upside from current prices).
  • Insiders own almost 80% of the Partnership's units.
  • It pays a whopping $3.52/unit. That works out to a mega-yield of almost 23%.
  • My take: Very attractive valuation, high insider ownership rates, and a whopping yield of 23% would suggest this stock is a strong buy. However, it is important to note that NTI is primarily a refinery operator, and as such benefits from the price difference between crude oil and refined products. When the spreads are wide, the company will profit greatly (and until-holders will receive massive yields), but if the price difference becomes smaller, then there is no guarantee that NTI will keep up on paying such high distributions. Essentially, that means that NTI investors will be exposed to the high volatility of the price spread sizes. That hardly means investors should not buy this stock, but they should expect more risk, and more volatility, than in other MLPs. However, more risk can also equal higher rewards.
  P/E Fwd P/E Avg PT (implied upside potential) Div Yield % shares insiders own
EROC N/A 30.32 $10.30 (+9.57%) 9.36% 1.41%
MCEP 18.36 11.14 $25.33 (+13.08%) 8.66% 25.53%
NTI 5.83 8.13 $27 (+4.49%) 22.91% 79.67%
Edge NTI NTI MCEP NTI NTI


wheckster has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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