Master Limited Partnerships (MLPs) can be ideal for generating passive income. Although these vehicles have more tax complications — they issue a Schedule K-1 for tax purposes instead of the more familiar Form 1099 — they must distribute 90% of their taxable income to investors to maintain their tax advantages. This means that most MLPs offer ultra-high dividend yields.
Three MLPs that are offering significant returns that they should be able to sustain for years to come are Crestwood Equity Partners ( CEQP 2.03% ), Energy transfer ( AND 0.93% )and Enterprise Product Partners (EPD 2.02% ). This makes them great options for investors looking to generate sustainable income. passive income.
Add more fuel to the distribution growth engine
Crestwood Equity Partners is currently offering a monstrous payout of 8.6%, light years ahead of the S&P500is 1.4% dividend yield. While such a high payout might seem like a high risk of discount, that’s not the case at Crestwood. Instead, the company expects increase its distribution by 5% this year.
The MLP can easily support this higher payout. It expects to generate enough cash to cover its 2.0 to 2.2 times distribution this year. Meanwhile, even after financing $160 million to $180 million in expansion projects — up from about $50 million last year — Crestwood is expected to generate $75 million to $135 million in excess cash. This will give it money to shore up its already strong balance sheet – leverage is within its long-term target range – and buy back some of its equity.
Crestwood may increase its payout as it recently completed its acquisition of Oasis Midstream. This agreement provided an immediate increase in cash flow, as well as future benefits through expansion savings and expansion projects. It was the first big step in Crestwood’s consolidation strategy, which could see it gobble up more MLP. These future deals, along with its organic expansion plans, would give it more fuel to continue growing its distribution in the future.
Return to where he was
Energy Transfer distribution is currently yielding 7.2%. This payout is also on track to increase this year. Energy Transfer recently increased it by 15% to $0.175 per unit each quarter.
It is probably the first of several increases that investors can expect in the coming years. Energy Transfer has set a goal of returning its distribution to its previous level of $0.305 per unit each quarter going forward. It reduced the payment from this level in 2020 to conserve more cash to reduce debt.
This strategy worked well. Energy Transfer paid off $6.3 billion in debt last year, putting its debt-to-equity ratio near its target range. This gives it the flexibility to start returning more cash to investors. It could immediately increase its payout to its old level as it generated enough cash to cover the current level three times last quarter. However, the MLP wants to retain some short-term financial flexibility to seize additional expansion projects. These projects would give him even more fuel to increase his payout in the future.
As stable as they come
Enterprise Products Partners pays an 8% distribution. What stands out about the MLP payout is its steady growth. Enterprise has increased its distribution for 23 consecutive years.
This upward trend looks set to continue. For starters, Enterprise Products Partners has one of the highest quality financial profiles in the MLP space. It has excellent credit and a conservative payout coverage ratio of 1.7 times.
This gives it the financial flexibility it needs to continue its expansion. The MLP recently completed its $3.25 billion purchase of Navitas Midstream Partners, expanding its operations into the rapidly growing Midland Basin. Meanwhile, it plans to invest $1.5 billion in expansion projects this year. These investments will help increase its cash flow, giving Enterprise more fuel to increase its distribution.
Fully funded passive income streams
Crestwood Equity Partners, Energy Transfer and Enterprise Products Partners generate lots of steady cash flow by operating midstream energy infrastructure. This gives them the funds to pay large distributions and invest in expanding their operations. Add to that their strong financial profiles, and all three have the fuel to keep increasing their already large payouts in the years to come. This makes them great options for investors looking for lucrative passive income streams.
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