Master limited partnerships (MLPs) are attractive to income investors because of their high yields and tax-advantaged status. Most MLP distributions are considered a return of capital and are not taxed as dividends in the year received. Rather, the dividend lowers the cost basis of the investment.
SafetyNet Pro recently added 34 MLPs to its ever-expanding roster of companies rated for dividend safety. Despite the fact that roughly 85% of MLPs are in the energy sector and that oil and gas have taken a shellacking this year, the majority of the MLPs rated by SafetyNet Pro are quite safe.
To celebrate the newly minted MLP SafetyNet Pro ratings, we’re going to take a look at one of the more popular MLPs, Enterprise Products Partners (NYSE: EPD).
Houston-based Enterprise Products Partners operates 19,400 miles of natural gas pipelines and 5,400 miles of oil pipelines, as well as other energy-related assets. The company does not drill for oil or gas. Rather, it sends the oil and gas of its customers through its pipelines, collecting a fee along the way.
In other words, Enterprise Products Partners is not directly impacted by the drop in oil and gas prices. If oil and gas producers want to move their products, they need to pay the owners of the pipelines.
Last year, Enterprise Products Partners had $4.1 billion in distributable cash flow. It paid out $2.7 billion for a payout ratio of 66%. That means that for every dollar of cash flow the company generated, it paid out $0.66 in distributions (MLPs call their dividends distributions). That is well within my comfort zone.
I like to see a company’s payout ratio below 75%. That way, if business declines, the company still has a buffer between its cash flow and its dividend payments, and it won’t have to dip into savings, borrow money or cut the dividend.
This year, cash flow is expected to be flat compared to last year’s, so, assuming the distribution is a little higher, it’s still within the safety zone. Going forward, however, we will need to see cash flow increase if the company raises its distribution.
And there’s a good chance it will increase the payout to investors.
Enterprise Products Partners has an outstanding track record of distribution raises. It has hiked the distribution every quarter for the past 11 years. Investors have come to expect those increases, so if the company were to not boost the distribution in the future, the stock would likely sell off and management would hear about it from unit holders (MLP shareholders are called unit holders).
So it’s likely that after 44 consecutive quarterly distribution hikes, management is going to do everything in its power to keep the streak alive.
Considering the company’s stellar track record and ability to pay the distribution, investors should feel comfortable owning one of the top-rated MLPs for dividend safety.
Dividend Safety Rating: A
If you have a stock whose dividend safety you’d like me to analyze, leave the ticker symbol in the comments section below. You can also search the Wealthy Retirement website to see if I’ve commented on your stock recently.
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