3 High-Yielding MLPs You Should Own Right Now

One of the best places for investors to find high yields right now is in the MLP (master limited partnership) sector.

Many MLPs pay 7% dividends and yield three times higher than S&P stocks or Treasurys. Many MLPs are pipeline businesses, earning that earn stable income from transporting oil and gas. Demand for their services is determined by energy volume, not prices, so MLPs they are less volatile than most other energy stocks, which make their cash distributions more reliable. And best of all — many MLP stocks yield as high as 7%, nearly yield three times higher than S&P 500 stocks or Treasurys.

If you believe like I do that energy demand will continue to steadily rise, then you can buy MLPs and feel fairly confident your investment will grow. If the MLP has well-positioned assets and a strong general partner, then share price gains are even more likely.

Here are three pipeline MLPs that fit that description…

1. Regency Energy Partners (NYSE: RGP)
Yield: 7%

Regency owns 5,200 miles of pipeline and related assets near many of America’s the United States’ richest emerging energy plays, including the Haynesville, Eagle Ford, Barnett, Fayetteville and Marcellus Shalesshales. Regency also owns a 50% interest in pipelines in Louisiana and Oklahoma, and a 30% interest in Lone Star, a natural- gas liquids storage and transportation business.

Regency’s cash flow increased 50% last year to $253.7 million from $169.2 millioncompared with in 2010 as a result of higher gathering and processing volume, and an earnings contribution from Lone Star. Net income improved to $74 million last year from a net loss of $11 million in 2010. and dDistributable cash flow of $285.1 million more than covered $274.5 million paid to unit holders.

In the next 18 months, Regency plans towill  invest $1 billion in expansion projects along its gas- gathering system that will extend the MLP’s footprint in key energy plays. Analysts think say the investments will support 20% yearly growth in earnings for the next five years. Regency also benefits from its relationship with general partner Energy Transfer Equity (NYSE: ETE), which provides the MLP with assets and access to capital.

Regency has grown distributions a total of 14% in the last past five years and raised the distribution again in January by 3% to a $1.84 annual rate. At the new higher rate, Regency shares yield about 7.1%.

2. Enbridge Energy Partners (NYSE: EEP)
Yield: 7%

Enbridge Energy Partners owns the main pipeline that transports Canadian crude oil to U.S. refineries. The company’s general partner, Enbridge (NYSE: ENB), owns the Canadian portion of the pipeline, while and the MLP owns the U.S. portion. The Enbridge MLP transports crude oil from Alberta oil sands in Canada and the Bakken formation in North Dakota.

The MLP’s cash flow nearly tripled last year to $1 billion from $378 million in 2010, and net income rose to $624 million in 2011 from a loss of $198.5 million a year earlier. The company produced distributable cash flow of $678.2 million and paid $672.8 million to unit holders in 2011.

Enbridge Energy will invest $2.1 billion this year in expanding its Bakken terminals and infrastructure. and tThe MLP is also partnering with others on the development of the Texas Express Pipeline, which will bring much needed capacity to Texas, Oklahoma and the mid-continent area.

Consensus estimates look for 12% earnings growth this year and 7%-a-year growth for the Enbridge MLP in the next five years.

In January, Enbridge Energy raised its distribution for the sixth year in a row to a $2.13 annual rate. The increase was 4% and in-line with the MLP’s long-term target of 2%-5% annual distribution growth.

3. El Paso Pipeline Partners (NYSE: EPB)
Yield: 6%

El Paso Pipeline Partners owns and operates 12,900 miles of natural gas pipeline and related storage assets. The company was formed in 2007 by El Paso Corp. (NYSE: EP), which is North America’s largest pipeline operator.

El Paso Pipeline has completed $4.8 billion of acquisitions since the public offering, including $1.4 billion of assets acquired from El Paso Corp last year, which further grew the MLP’s transportation assets and cash flow. The MLP’s earnings grew 25% last year, from $378 million to $478 million, and cash flow improved 11%, from $672 million to $748 million. Analysts look for 10% earnings growth this year and next year. 

The MLP’s distributable cash flow was strong at $540 million, roughly and 1.2 times the dividend payout. In January, El Paso Pipeline increased the distribution to a $2.00 annual rate. The new rate is a 2% increase from the third quarter and 14% higher than one year ago. This MLP has increased distributions every quarter since the November 2007 offering.

Risks to consider: MLPs offer potential tax advantages since a portion of their payouts can be tax-deferred. For that reason, MLPs are generally best held in non-retirement accounts. Enbridge Energy was recently forced to revise historical earnings downward because of an accounting misstatement, and there is risk of more unpleasant earnings surprises. There is risk that El Paso Pipeline will no longer automatically receive asset drop-downs from its former parent. El Paso Corp is merging with Kinder Morgan (NYSE: KMI), and the MLP may be forced to compete with two other Kinder Morgan MLPs (KMP and KMR) for these assets.

Action to take –> MLPs offer potential tax advantages, since a portion of their payouts can be tax-deferred. For that reason, MLPs are generally best held in non-retirement accounts.

My top pick overall is El Paso Pipeline because of the MLP’s impressive distribution growth since its 2007 offering, but Enbridge Energy and Regency also provide generous yields and good prospects for distribution growth.