Understanding High-Yield MLPs And How to Choose the Best Ones

Indie Research

Investors looking for yield plays have undoubtedly come across the acronym MLP, particularly when looking at opportunities in the energy sector. If you are confused about what an MLP is, here's a primer on these attractive, high-yielding stocks.

MLP stands for master limited partnership, which is a business structure designed to pass through the bulk of its income to shareholders. The big benefit of the MLP setup is the tax advantage it provides to both the business and shareholders. As entities that distribute the majority of their cash flow to shareholders, MLPs don't have to pay taxes at the company level, which greatly lowers their cost of capital.

In order to qualify to become an MLP, a company generally has to earn 90% of its income through activities involved with the production or transportation of natural resources and/or commodities. There are a few exceptions, as we've come across MLPs tied to real estate, amusement parks, and even one operating in the death care business. Firms best suited for the MLP structure are those that have steady, predictable cash flows, as cash flow is king in the MLP world.

Many of the opportunities in the MLP universe come in the form of pipeline and shipping companies that produce dependable cash flows. The key metric to look at is Distributable Cash Flow (DCF), which is the amount of cash available for distribution that an MLP generates. Net income isn't terribly important for many MLPs, as they can show net losses due to large depreciation expenses and still produce substantial DCF.

In its fourth annual MLP special report, a new 70-page report that covers 50 MLPs and LLCs, BullMarket.com gives its top picks in eleven different MLP subsectors. It also looks in detail at what an MLP is, examines the dynamics of the various industries they operate in, explains and displays various valuation metrics, and answers some common investor questions about MLPs. All in all, it is one of the most comprehensive reports on MLPs an individual investor will find.

Just a few of the stocks featured in the report include Enterprise Products Partners (EPD), Kinder Morgan Energy Partners (KMP), Linn Energy (LINE), NuStar Energy (NS), MarkWest Energy (MWE), and Alliance Resource Partners (ARLP), among many others.

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