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Three MLPs for Safe Income
Posted by: sirajsarwar (IP Logged)
Date: October 1, 2013 09:00AM

Interest-rate risk is on top-of-mind for many investors who are interested in income. The long-term Treasury yield surged up to 3%, which were standing well below 2% only a couple months ago. This move in interest rate put many of income-producing stocks under pressure. However, high-dividend stocks such as Master Limited Partnerships (MLPs) can be a very attractive choice for an investor.

MLP stocks, in addition to paying a high dividend, offer an attractive tax advantage. The income from MLPs is not taxed at the partnership level. This makes investing in MLPs a smart strategy for investors because it is treated as an average company. In this piece, I chose three of the best MLPs for safe income. These MLPs offer yields of around 4% to 6%, which is more than double the S&P average, and are going to grow at least as fast as inflation.

These three MLPs have a long history of consistently increasing distributions. The MLPs included in this group are Sunoco Logistics Partners (SXL), Enterprise Products Partners (EPD) and Kinder Morgan Energy Partners (KMP). Each of these MLPs was evaluated for their consistently increasing distributions.

Sunoco Logistics Partners Distributions

Sunoco is one of the best MLPs operating in the Oil & Gas Midstream industry. This MLP has a successive 33-quarters-long history of raising its distributions. For the past three quarters, it has raised its distributions to 5%. Sunoco currently offers a quarterly distribution of $0.60 per unit.

Why Distributions Are Safe

Sunoco Logistics Partners is engaged in the transport, terminalling and storage of refined products and crude oil. Sunoco’s core assets are liquid pipelines that receive inflation-protected annual rate adjustments. Its relatively large planned organic capital investment can boost cash flows over the next several years.

Sunoco has been benefiting from its ties with Sunoco Inc. This company retains a 34% stake in the partnership. Its sound fee-based relationship with Sunoco Inc. shields it from competitive pressures in the midstream energy space. As an outcome, recent results show an increase of $26 million in adjusted EBITDA.

In relatively tough market conditions, Sunoco’s crude-oil projects increased its ratable earnings. Its distributable cash flows reached record growth of 57% in the last quarter alone. This bodes well for future distribution increases. In addition, its Permian Express 1 project began operations and will reach its full capacity by the end of 2013. This provides Sunoco with stable cash flows and consistent top-line growth opportunities.

Enterprise Products Partners Distributions

Enterprise Products Partners offers a quarterly distribution of $0.68 cents per unit. The partnership is offering quarterly increases in its distributions. In the last five years, it has increased quarterly distributions by 30.54%.

Why Distributions Are Safe

Enterprise has the potential to generate increasing earnings and distributable cash flows. Its distributable cash flows provide full coverage to its distributions. At the end of the second quarter, its distributable cash flows provided 1.4 times the coverage to cash distribution. The increase in distributable cash flows represents a 19% raise over the last year’s quarter.

This MLP is also investing heavily to grow its assets and earnings. In the last quarter alone, it had invested nearly $700 million in growth opportunities. These investments include expansion of a propylene fractionation complex in Mont Belvieu and NGL pipelines serving the Eagle Ford shale. These assets will further enhance its cash-generating ability in the current quarter.

In the current quarter, Enterprise is seeking to complete projects of around of $1.5 billion. In order to back its growth projects, it has strengthened its balance sheet and increased its liquidity. To do this, it has been taking the number of initiatives, such as refinancing its credit facility, issuing its equity and retaining cash from distributable cash flows.

Kinder Morgan Energy Partners Distributions

Kinder Morgan is one of the largest MLPs operating in the Oil & Gas Midstream industry. Kinder Morgan offers a high yield of 6.39%. The partnership currently offers a quarterly distribution of $1.32 per unit.

Why Distributions Are Safe

Kinder Morgan Energy Partners LP owns and manages a portfolio of energy transportation and storage assets. This partnership is part of the Kinder Morgan family of companies, which operates the largest midstream system in North America.

The company has potential growth prospects with its increase in energy usage. To capitalize on this opportunity, it is making acquisitions such as its recently completed Copano Energy transaction. It is also making plans to expand its pipeline systems in Canada.

Kinder Morgan Partners operates in five segments, including Gas Pipelines, Products Pipelines Natural, a CO2 business, Kinder Morgan Canada and Terminals. All of its business segments are generating massive profits. These profits are particularly through its Natural Gas Pipelines segment, which is reaching new high due to the Copano acquisition. This segment shows an increase of $338 million in adjusted earnings over the last year.

Overall, its adjusted net income of around $627 million increased from the $467 million posted last year. Its distributable cash flows increased to $505 million, representing an increase of 38%. Its distributions look very safe. The safety of these distributions is due to its continuing investment in growth opportunities, which is increasing cash flows. With its presence in many segments and dominance in others, Kinder Morgan is a stable MLP to buy.


All three MLPs look safe for income-oriented investors. These three MLPs have been showing a strong financial position to back returns. The MLPs are investing heavily in growth opportunities to provide them with stable cash flows and consistent top-line growth opportunities.

Stocks Discussed: EPD, KMP, SXL,
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