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MLPs with the Highest Distribution Yields in 2018


Nov. 20 2020, Updated 11:39 a.m. ET

Alerian MLP Index yield

MLPs lead in terms of yield compared to other investment options. The Alerian MLP Index (^AMZ) is currently trading at a yield of ~8.2% while the SPDR S&P 500 (^GSPC) is trading close to ~1.9%. The Alerian MLP ETF (AMLP) and the SPDR S&P 500 ETF (SPY) track the performance of AMZ and GSPC, respectively.

REITs and utilities, which are also considered income-generating investments, are trading at ~4.1% and ~3.9%, respectively.

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The yield spread between MLPs and other investment options reflect risks specific to MLPs such as relatively higher commodity price exposure, higher leverage, and higher counterparty exposure. However, most MLPs have worked on these issues through asset divestiture, flat distributions, and the maintenance of strong distribution coverage to avoid distribution cuts.

Out of 90 nonvariable distribution-paying midstream companies, which includes the midstream C corporations and GPs of MLPs, 41 grew their distributions in the fourth quarter. Plus, 45 kept their distribution flat, and two announced distribution for the first time.

Only two MLPs—Foresight Energy Partners (FELP) and Westmoreland Resource Partners (WMLP)—announced a distribution cut in the fourth quarter. NuStar Energy (NS) would be added to the list of MLPs that have announced a distribution cut since inception in the first quarter of 2018.

Distribution growth outlook

MLPs seemed to be on the path of recovery as far as distribution growth is concerned. Major midstream companies such as Kinder Morgan (KMI) and Williams Companies (WMB) are planning to resume distribution growth this year.

We are less likely to hear about more distribution cuts, if not distribution increases, in 2018 until there is a sharp decline in crude oil and natural gas prices. This decline seems less likely. This trend is due to improvement in distribution coverage and strong expected distributable cash flow growth in 2018.

High-yielding MLPs

NuStar Energy, Navios Maritime Midstream Partners (NAP), and Dyngagas LNG Partners (DLNG) have the highest distribution yields among the regular distribution-paying MLPs. These MLPs are currently trading at massive yields of 20.4%, 18.2%, and 16.9%, respectively. However, such high yields may not be sustainable in the long run, as they reflect increased risk and the high cost of equity capital.

NuStar Energy, Summit Midstream Partners LP, Sanchez Midstream Partners, and Summit Midstream Partners are among the midstream MLPs that have high distribution yields. For analysis of top-yielding MLPs, please read MLPs: Are Investors Missing Out on Their Attractive Yields?

In the next article, we’ll analyze MLPs’ current valuations based on yield spreads and EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiples.


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