Given the shaky global economy, this might be a good time to consider
Master Limited Partnerships (MLPs), in particular, those that operate
natural gas pipelines.
Many pipeline operators, relatively immune to economic downturns,
already paying dividends equating to 5% to 7% yields, will probably
grow their payouts substantially over the next few years.
Although not corporations, MLPs trade on major exchanges just like
regular stocks. MLPs can pay those big dividends because they don’t
pay federal income taxes. Instead they distribute their earnings to
Besides for natural gas pipeline operators, you can find MLPs that
operate crude oil and/or refined petroleum product pipelines, MLPs
that are propane distributors, and others that produce oil crude oil
and/or natural gas.
The way MLPs are structured, a general partner runs the business, while
individual investors are limited partners. The general partner
receives a percentage of the profits before the limited partners get
When MLPs first started in the mid-1980s, oil and gas producers set them
up for tax purposes. They would transfer their pipeline assets to an
MLP, with the oil or gas producer as the general partner.
Although that still happens, nowadays some general partners are in
unrelated businesses. In fact, many general partners are themselves
MLPs, which are also publicly traded.
The terminology for MLPs is different than for corporations. You own
units instead of shares, and the payouts are called distributions
instead of dividends.
So, why am I telling you about MLPs now?
Pipeline owners operate relatively stable businesses. Profits depend
more on the volume of product transported than on oil or gas prices.
They’re not affected by what happens in Greece or Italy. A slowing
U.S. economy might cut the volume of products transported, but not by
that much. Since they usually serve different geographic areas,
pipelines don’t to worry much about competition.
Most pipeline operators are growing steadily, both by increasing the
capacity of existing pipelines and by building or acquiring new
pipelines. However, the outlook for natural gas pipeline operators is
National policy encourages finding ways to substitute natural gas for
crude oil and coal wherever possible. New drilling techniques have
made natural gas plentiful, driving down prices, further encouraging
its use, and hence, the need for pipelines.
Besides for long-haul pipelines, natural gas pipeline MLPS also operate
gas-gathering systems, which connect wells to public pipelines, as
well as processing plants that produce natural gas liquids such as
propane or butane.
The gathering and processing operations expose pipeline operators to
short-term natural gas price fluctuations, so profit margins can vary
when prices change rapidly.
Roughly 75% to 85%
of MLP distributions (dividends) are classified as return of
capital, which are not taxable until you sell your holdings. The
balance, typically 15% to 25% of distributions, is return on
capital and is taxable in the year received.
If you hold MLPs in a tax-sheltered account, such as an IRA, your return
on capital distributions (from all MLPs) should not total more
than $1,000 in a single year. If they do; the amount exceeding $1,000
may be considered unrelated business income and subject to taxes. For
that and other reasons, MLP tax reporting is more involved than for
regular dividend stocks.
You can use the free stock screener provided by FINVIZ.com to find
pipeline MLPs. If you’re not familiar with the term, a stock screener
allows you to search through all listed stocks to find those meeting
your specific requirements.
Find the screener from the FINVIZ homepage (finviz.com)
Screener. FINVIZ calls its selection parameters “filters.” On the
Filters bar, select “All” so that you can see all of the available
filters at the same time. Use the associated dropdown menus to select
the desired filter values. Start by specifying “Oil & Gas Pipelines”
from the Industry menu. Then, select “Market-Cap Over Two Billion” to
rule out small players, which are inherently riskier than larger
Next, select “Over 5%” for dividend yield to
limit your search to high-dividend candidates. Then, specify “Over
5%” for “return on equity,” which is a
profitability measure, to limit your list to the most profitable
You need growing earnings to power dividend growth, so specify “Over
5%” for “EPS Growth Next Five Years,” which
means that analysts are expecting at least 5%
average annual long-term earnings growth.
Finally, specify “over 40%” for institutional ownership to limit the
field to MLPs that are in favor with the “smart money.” Try reducing
this limit to “over 30%,” or “over 20%” if you want to see more
here to see which MLPs the screen turns up today.
As is the case for all stock screens, consider the MLPs turned up by the
screen to be research candidates, not a buy list. The more you know
about your stocks, the better your results.