Master Limited Partnerships (MLPs) are ideal candidates for the portfolios of income-oriented investors. They offer tax-advantaged income and return most of their cash flows to their shareholders. As a result, they offer distribution yields that are much higher than those of the vast majority of stocks. In this article, we will analyze three high-quality MLPs which are remarkably attractive right now.

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Enterprise Products Partners (EPD)

Enterprise Products Partners is a midstream MLP, with a vast network of pipelines and storage tanks. Its network includes nearly 50,000 miles of pipelines of natural gas, natural gas liquids, crude oil, and refined products. It also has storage capacity of more than 250 million barrels. The MLP collects fees that are proportional to the volumes of products transported and stored in its network.

Enterprise Products Partners generates 88% of its operating income from fee-based activities, while another 9% of its operating income is affected by the difference between commodity prices. As a result, only 3% of its operating income is directly exposed to the cycles of commodity prices.

Thanks to its defensive business model, Enterprise Products Partners has proved one of the most resilient energy stocks to recessions. It has thus managed to raise its dividend for 22 consecutive years. As this period includes the Great Recession, the collapse of the prices of oil and natural gas in 2014-2016, and the pandemic, the achievement of Enterprise Products Partners is a testament to its robust business model.

Moreover, the stock is currently offering a 7.7% distribution yield. Given the strong distribution coverage ratio of over 1.6 of the MLP, its decent balance sheet and a promising pipeline of growth projects, investors should rest assured that the distribution of this high-quality MLP is safe for the foreseeable future.

Magellan Midstream Partners (MMP)

Magellan Midstream Partners has the longest pipeline system of refined products, which is linked to nearly half of the total U.S. refining capacity. This segment generates 65% of total operating income while the transportation and storage of crude oil generate the remaining 35% of operating income.

Just like Enterprise Products Partners, Magellan Midstream Partners has a fee-based model, with only about 10% of its operating income linked directly to commodity prices. Thanks to its defensive business model, Magellan Midstream Partners has proved rock-solid during recessions.

In the fierce downturn caused by the pandemic in 2020, most oil companies incurred hefty losses, but Magellan Midstream Partners incurred just an 18% decrease in its distributable cash flow per share. Even better, the MLP partly recovered last year thanks to the recovery of the demand for oil products and is on track to keep growing its distributable cash flow this year thanks to sustained improvement in its business conditions.

Moreover, Magellan Midstream Partners has an exceptional distribution growth record. The MLP raised its distribution for 70 consecutive quarters at a 12% average annual rate, until it froze its distribution in the second quarter of 2020 due to the pandemic. It paid the same distribution for seven consecutive quarters and resumed raising its distribution in the fourth quarter of 2021 thanks to the recovery of its business.

The stock is currently offering an 8.5% distribution yield with a coverage ratio of 1.2. Given the resilience of this best-of-breed MLP to recessions, its admirable performance record, and its healthy coverage ratio, investors should lock in its 8.5% distribution yield before it is too late.

Sunoco LP (SUN)

Sunoco LP is an MLP that distributes fuel products through its wholesale business units. It purchases fuel products from refiners and sells those products to both its own and independently-owned dealers.

Sunoco LP is one of the largest independent fuel distributors in Texas and among the top distributors of Exxon Mobil, Chevron and Valero branded motor fuel in the rest of the U.S. The company has distributed approximately 7.5 billion gallons of fuel products in the last 12 months and hence it enjoys great economies of scale. A great scale is paramount in the fuel wholesale industry, as it results in a better negotiating position with suppliers and hence in wider profit margins.

Sunoco LP has proved remarkably resilient throughout the coronavirus crisis. While it inevitably saw its volumes decline in 2020 due to the unprecedented lockdowns imposed in response to the pandemic, the company enjoyed markedly wide margins thanks to the volatility of oil prices. As a result, it grew its distributable cash flow per share by 15% in 2020 and by another ~12% in 2021.

It was also able to defend its generous distribution. Since its formation in 2012, Sunoco LP has never cut its distribution. The stock is currently offering a 7.6% distribution yield, with a strong coverage ratio of 1.4. Given also its manageable leverage ratio (Net Debt to EBITDA of 4.05) and its resilient business model, investors should rest assured that the 7.6% distribution of the stock is safe.

On the other hand, it is important to note that the MLP has paid the same distribution for five consecutive years. As a result, it is prudent not to expect meaningful distribution growth for the foreseeable future. 

Final Thoughts

As the S&P 500 has essentially doubled off its bottom in 2020, it has become hard to identify stocks with attractive yields. The above three MLPs are best-of-breed stocks, which offer exceptionally high yields and have proved resilient even under the fiercest business conditions. As a result, they are great candidates for the portfolios of income-oriented investors.