7 High-Yield MLPs You Can Invest In Today

Master limited partnerships (MLPs) are businesses in industries such as oil and gas that could provide strong dividend yields for investors.

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Updated May 13, 2024
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Interested in assets that pay income? One possibility to consider is investing in a master limited partnership (MLP). MLPs often pay it forward with high-dividend yields, providing investors with a nice income stream every year.

MLPs come with other advantages, too. For example, the majority of dividends from MLPs are generally tax-deferred. If that sounds like your ideal investment, we’ll cover some of the best high-yield MLPs to consider adding to your portfolio.

In this article

What are MLPs?

MLPs are a type of partnership that is available on the stock market and trade on exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq. They also have certain tax advantages.

MLPs typically have general partners and limited partners. General partners manage the day-to-day operations of the MLP. Limited partners purchase shares, known as units, and provide funds to the MLP. Investors who have purchased units of an MLP are known as unitholders rather than shareholders.

MLPs are treated as a pass-through entity, which means they don’t have to pay corporate federal income tax. Although MLPs can avoid corporate tax, this requires that at least 90% of their income come from qualifying sources.

Qualifying sources include activities such as the exploration, production, transportation of natural resources, and other energy infrastructure activities. This means oil and natural gas are among the most common assets associated with MLPs.

There are several types of MLPs, but some of the most common are in the energy sector and include pipelines, gathering and processing oil and gas, exploration and production of oil and gas, and specialty MLPs. Investors can buy shares in a single MLP or invest in an MLP fund that holds several of the largest MLPs.

Why invest in MLPs?

For investors, there are two main benefits of MLPs as an asset class: potentially high distribution yields and favorable tax treatment.

The majority of dividends investors receive tend to be tax-deferred, whereas only a small portion is taxed as income. Historically, 70-100% of dividends received from MLPs have been tax-deferred, in part due to the depreciation of infrastructure such as oil and natural gas pipelines and storage facilities.

The majority of quarterly distributions from MLPs are typically treated as a return of capital rather than dividend income, which is what allows you to defer taxes. A return of capital essentially returns the money you invested back to you, and taxes on a return of capital are deferred until you sell the MLP.

For instance, if you have $10,000 invested in an MLP that pays 6% in dividends per year, you would receive $600 in dividends. If 80% of that income is a return of capital and tax-deferred, you only pay taxes on $120 in dividends in the year you receive them. The exact percentage that is tax-deferred depends on the details of the MLP.

Another benefit of MLPs is their high yields. For the past 10 years, the average dividend yield for MLPs has been around 8%, which is much higher than the total returns you usually receive when investing money in stocks and bonds. This makes MLPs appealing to income investors.

In addition to the potentially high yields and tax treatment, some investors use MLPs for diversification. MLPs could diversify a portfolio that already has traditional investments like stocks and bonds.

Drawbacks to MLPs

There are some risks that you should keep in mind before you invest in an MLP. Some of the biggest risks are industry risk and volatility.

First, consider industry risk. Recall that most MLPs deal in energy sector industries such as oil and gas. As a result, most of the benefits are concentrated around a few closely related industries. This makes them vulnerable to changes in oil and gas prices. For example, a decline in the price per barrel of oil could have a big impact on an MLP’s cash flow.

Another drawback of MLPs is that they can be volatile. When compared with stocks and bonds, they have historically been much more volatile, in fact. So although it may be tempting to see MLPs as a source of fixed income, they are stocks and don’t have guaranteed returns.

MLPs also aren’t a great fit for individual retirement accounts (IRAs) and other tax-advantaged retirement plans. This is because they may incur Unrelated Business Taxable Income (UBTI), which could be taxable, even if you’re holding them in an IRA. In fact, due to the tax complexities, it may be best to work with a tax professional if you’ve invested in MLPs to ensure your taxes are completed correctly.

7 High-Yield MLPs to consider

MLPs are dividend stocks that could provide consistent, high yields for investors. Although dividends are never guaranteed, these are a few options that may be worth a look if you are interested in adding them to your portfolio.

Enterprise Products Partners

Enterprise Products Partners is one of the largest publicly traded energy partnerships. Its operations include natural gas and crude oil pipelines as well as petrochemicals and refined products. In total, its portfolio includes more than 50,000 miles of pipelines and 260 million barrels of crude oil and refined products storage.

Enterprise Products Partners pays quarterly dividends of about 45 cents per share in the past few years. Although those payments have been fairly consistent as of late, they are lower than the dividends this MLP paid in earlier years, such as in 2014 and 2015. Nevertheless, with a yield of 6.9%, EPD’s dividend is only slightly lower than the average for MLPs.

Magellan Midstream Partners

Magellan Midstream Partners is an MLP based in Tulsa, Oklahoma, that transports, stores, and distributes refined petroleum products and crude oil. It owns 9,800 miles of pipelines, including 2,200 miles of crude oil pipelines. In addition, it has 39 million barrels worth of storage.

Magellan Midstream Partners (MMP) has consistently increased its dividend payments, with each year paying more than the year before. In the last quarter of 2019, in all of 2020, and in the first two quarters of 2021, it paid the same dividend of $1.0275 per share. However, there have been many cases where it increased its dividend several quarters in a row. Since its IPO, it has increased its dividend by 690%. Currently, it has a yield of nearly 8.5%.

Capital Product Partners

Unlike other names on this list, Capital Products Partners (CPLP) is a shipping company. CPLP is based in Greece. However, the company does ship natural gas in addition to dry cargo. Currently, its fleet includes 21 vessels.

Currently, CPLP pays a quarterly dividend with a yield of 3.91%. Although that is lower than others on this list, it decreased its dividend from 35 cents per share to just 10 cents per share in Q3 2020, when COVID-19 was ramping up. More recently, however, it has increased its dividend to 15 cents per share. In the 2010s, it paid a consistent dividend of about 23 cents per share.

Crestwood Equity Partners

Crestwood Equity Partners is a Houston, Texas-based MLP that owns and operates midstream assets. These assets are a part of the oil and gas supply chain. In particular, it aids in the supply of natural gas, crude oil, and natural gas liquids (NGLs).

Crestwood Equity (CEQP) pays quarterly dividends that have been relatively stable for the past several years. However, in 2016, it reduced its dividend to less than half of what it had been paying since 2013. Nevertheless, it pays a strong dividend of just under 8.75%.

MPLX LP

MPLX is an MLP formed by Marathon that owns and operates midstream assets in addition to providing fuel distribution services. Its other products and services include refinery tanks, docks, loading racks, and associated piping. The company is based in Findlay, Ohio.

MPLX LP (MLP) has a dividend yield of more than 8.6%. In each of the first two quarters of 2022, it paid 70.5 cents per share to investors. Throughout most of 2020 and 2021, it paid 68.8 cents per share. However, in Q4 2021, it paid $1.28 per share. Overall, this MLP has been increasing its dividend over time.

Energy Transfer LP

Energy Transfer states it’s one of the largest and most diversified midstream energy companies in North America. It has about 120,000 miles of pipelines in its portfolio, through which about 30% of the country’s natural gas moves. The company is based in Dallas, Texas.

Energy Transfer (ET) has a dividend yield of 6.88%, paying 20 cents per share to investors in the second quarter of 2022. The company was forced to slash its dividend from 30 cents per share in Q2 2020 to just 15 cents per share in Q3 2020. However, it has begun slowly increasing its dividend once again, with a slight uptick in payout in each of the first two quarters of 2022.

Alerian MLP

If you are interested in an MLP investment but would prefer to diversify, one option is the Alerian MLP. The Alerian MLP (AMLP) is an exchange-traded fund (ETF) that has holdings in many of the energy MLPs on this list. These include Energy Transfer, Enterprise Products, Magellan Midstream Partners, MPLX, and Crestwood Equity Partners. The largest single holding is Energy Transfer, which makes up 11.2% of the portfolio.

AMLP pays quarterly dividends to investors. Unlike some individual MLPs, which slashed their dividends in mid-2020, AMLP increased its dividend payout by nearly four times in Q2 2020 to 75 cents per share. Although its dividend has decreased slightly since then, it paid 71 cents per share in the first quarter of 2022.

FAQs

Are MLPs a good investment?

Whether MLPs are a good investment depends on your financial goals and the performance of the MLP. As with any investment, MLPs come with their own set of pros and cons.

Investors appreciate their high dividends, a large portion of which could be tax-deferred. However, most MLPs operate in the energy industry, which makes them somewhat concentrated. They can also be quite volatile, and MLPs sometimes have to slash dividends if they have less cash to pay to investors.

What is the difference between an MLP and a REIT?

A REIT is a real estate investment trust. MLPs, on the other hand, usually (but not always) operate in the natural resource and energy industries. Although REITs pay no corporate tax if they distribute 100% of their income to investors, MLPs only have to distribute 90% of their income for that privilege.

Why do MLPs have high dividends?

MLPs have high dividends for two main reasons. One is that they are not taxed at the corporate level if they pay at least 90% of their income to investors. The other is that they operate assets, such as pipelines that create consistent cash flows.

Bottom line

MLPs could be an attractive investment for those looking for high dividend payouts. They are especially attractive because the bulk of their dividends could be tax-deferred for investors. That means you may not have to pay taxes on a large percentage of the dividends from MLPs until you sell them. However, MLPs can be volatile, both in terms of their share price and also their dividend payouts.

To get started with MLPs or other investment options, review our list of the best brokerage accounts.

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Author Details

Bob Haegele

Bob Haegele is a seasoned personal finance writer, leveraging his bachelor's degree in information technology from Marquette University to dissect complex financial topics.