Anyone who wants high-yield stocks in their portfolio should be investing in Master Limited Partnerships (MLPs).
MLPs are special kind of dividend stocks. Technically, MLPs are tax-advantaged limited partnerships whose units are traded on exchanges just like common shares of stock.
But what sets MLPs apart from most stocks is that MLPs pay very high yields — typically 5% to 12%. This is because U.S. law mandates that they pass most of their income on to unit holders.
That’s why investing in MLPs is such a smart strategy for the dividend-hungry investor.
However, the unusual nature of MLPs — their income is not taxed at the partnership level — means the government only allows businesses deemed essential to the U.S. economy and national security to adopt the model.
In practice, that typically means companies engaged in the extraction, storage, and transportation of energy commodities like oil, natural gas, and coal, although MLPs do crop up in other industries, such as shipping.
While knowing how to invest in MLPs is great to boost your income, as stocks they usually don’t have a lot of upside unless the underlying commodity experiences a price spike.
Nevertheless, the exceptionally high dividends make investing in MLPs worthwhile for at least a portion of a portfolio.
Investing in MLPs 2013: Three High-Yield Picks
For those seeking the most bang for their investing buck, we’ve identified three MLPs with dividend yields that pay more than 8%. They are:
1. Legacy Reserves LP (Nasdaq: LGCY) – Current Yield: 8.70%
This independent oil and natural gas MLP acquires and develops properties in the Permian Basin, the Mid-Continent and the Rocky Mountain regions.
Legacy Reserves has had four years or more of revenue growth, dividend increases and cash flow improvement. Revenue growth in the most recent quarter was a healthy 9.7%, and net operating cash flow was up 23.88%.
In addition, LGCY’s profit margin, is 15.04%. The stock trades at about $26.50, but has some upside there as well with a one-year price target of $31.
2. Natural Reserves Partners LP (NYSE: NRP) – Current Yield: 9.90%
Investing in what appears to be an unloved and dying industry like coal mining might seem crazy but you can’t argue with NRP’s lofty yield.
And this MLP’s numbers are just stunning, with a profit margin of 59.60% and a return on equity of 31.98%. And like LGCY, Natural Reserves Partners could have some upside.
The stock currently trades at about $21.70, but has a P/E ratio of just 11.29 and a one-year target of $26.75.
3. Eagle Rock Energy Partners LP (Nasdaq: EROC) – Current Yield: 10.40%
Eagle Rock Energy Partners operates in two areas: it’s a midstream company that gathers, treats, processes and transports natural gas, natural gas liquids, and oil but is also an upstream company that develops and produces natural gas and oil.
EROC has the highest yield of the three MLPs in this list, but is also the riskiest. On the one hand, EROC’s quarterly revenue growth was up 17.5% year over year in its most recent quarter, and net income rose 33.4%.
And the company is expected to post significant earnings-per-share growth this year over last year. But EROC has a debt-to-equity ratio of 1.25, higher than the industry average, and saw a big drop in return on equity to -14.48% in its most recent earnings report.
EROC trades at about $8.63 and has a one-year price target of $9.70.
While these MLPs are attractive choices, Money Morning Global Energy Strategist Dr. Kent Moors recently listed the six best MLPs you can own right now for readers of his Energy Advantage newsletter.
For those interested in investing in MLPs, Kent’s service is a must-have.