The Power of MLP Distributions
Dec 23rd 2013 10:00AM
Updated Dec 23rd 2013 10:02AM
Master limited partnerships have garnered an awful lot of attention in 2013. IPOs for these energy companies were at an all-time high, and so was the media coverage. If you're an investor considering MLPs for the first time, you might be wondering what all the clamor is about. Today, we're going to look at Magellan Midstream Partners and Enterprise Products Partners to show the power of an MLP's distributions.
MLP investors are in this game for the yield. You want an MLP's distributions to boost the total return of the units you own, and if you can rely on that boost year after year, all the better.
The two MLPs we're looking at today do not post astronomical yields. In fact, Magellan currently yields 3.7%, while Enterprise sits at 4.4%, both below the average yield for the space, which is about 6%. You'll often see MLPs posting even higher yields than 6%. These MLPs are usually compensating for risk when they offer those high yields, whereas Magellan and Enterprise have consistency and reliability baked in to their yield.
Enterprise, for example, has increased its distribution every quarter for the last nine years, while Magellan has increased it every quarter for the last three and a half. This past quarter, Enterprise increased its payout 6% year over year, while Magellan grew its by an outstanding 15% over the same period.
Let's have a look at what this means over the long haul. Here is how the total return of our two MLPs compares to the total return of the S&P 500 over the last five years:
It takes just a year for our MLPs to post significant separation; the S&P just doesn't stand a chance over time. Even this year, the index is outpacing Enterprise on price alone, but once you factor in the total return (i.e., account for dividends), Enterprise performs more than a full percentage point better than the S&P. Magellan for its part, is crushing both of them, returning more than 36% year to date.
Lastly, both Magellan and Enterprise sport distribution coverage ratios greater than 1.0, which means that they are generating more than enough cash to cover the distributions they pay out on a quarterly basis. Despite the importance of this metric, achieving one times coverage is by no means a guarantee in the MLP space, and it speaks to the fundamental strength of these two outfits.
Looking at past performance does not guarantee anything, of course, but it does show that these master limited partnerships are well-run businesses that are more likely than others to perform well going forward because management has experience doing just that. The partnerships have put a lot of capital toward maintaining and growing their respective businesses to support the growth taking place in America's energy sector right now, allowing their distributions to do the same important work for your portfolio.
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The article The Power of MLP Distributions originally appeared on Fool.com.Fool contributor Aimee Duffy has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners and Magellan Midstream Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.