3 Big Dividends From Investing's Best-Kept Secret

Master limited partnerships, or MLPs, are one of dividend investing's best-kept secrets. With yields sometimes reaching 7% or more, they offer some of the biggest, safest dividends around.

These big, sustainable yields come courtesy of Congress. To encourage development of America's energy infrastructure, Congress grants MLPs an exemption from taxes at the company level. As such, MLPs transfer nearly all the profits they generate to their shareholders, or "unitholders" in MLP jargon. Unitholders then pay taxes on the dividends, or "distributions," they receive.

In the second of an ongoing Motley Fool series, today we'll look at three MLPs and analyze the most important metrics for each. By the end of the column, you'll have a good feel for what to look for when evaluating an MLP and will have three solid in-kind investing ideas to get you started.

1. NuStar Energy (NYS: NS)
NuStar Energy stores and transports petroleum products in the U.S., Canada, and in countries around the world, including the Netherlands, the U.K., and Turkey. Its assets include 8,420 miles of pipeline, 89 storage facilities, two asphalt refineries, and a fuels refinery. NuStar Energy is based out of San Antonio and was founded in 1999.

MLPs often have a partner that manages their business affairs and feeds them their lucrative deals. NuStar Energy's managing partner is NuStar GP Holdings (NYS: NSH) . The numbers for NuStar Energy:

  • A good yield by non-MLP standards is about 3%, an arbitrary number but one we feel separates the wheat from the chaff. NuStar Energy's is a whopping 7.5%.

  • Payout ratios give you a clue as to how sustainable a distribution is. For non-MLPs, in general, the higher the ratio, the less sustainable the distribution. But as explained earlier, MLPs are designed to pay out as much money as possible to unitholders and so typically have much higher payout ratios. NuStar Energy's payout ratio is a very high 156%.

  • It's always nice to see an ever-increasing distribution, and over five years NuStar Energy has grown its distribution by about 4% per year.

Interestingly, NuStar Energy just made Fortune magazine's annual list of "100 Best Companies to Work For." Motley Fool co-founder and CEO Tom Gardner is a big believer in the notion that happy employees make for better-performing companies in the long run.

2. Magellan Midstream Partners (NYS: MMP)
With access to more than 40% of the nation's petroleum refining capacity, Magellan Midstream Partners stores, transports, and distributes petroleum products in the U.S. Its assets include 9,600 miles of pipeline and more than 75 million barrels of storage capacity. The company is based out of Tulsa, Okla., and was founded in 2000. By the numbers:

  • Magellan's distribution yield is 4.5%, a little on the low side for the MLPs we've looked at, but a very solid return on your investment any way you look at it.

  • The company's payout ratio is 85% -- again, on the low side for an MLP, but the company is still doing a good job of passing profits along to investors.

  • The company's five-year average dividend yield is 6.3%, which bodes well for the company raising its yield in the future. And Magellan's average dividend growth over the last five years is a robust 6%.

Magellan is also not just sitting still, but instead looking ahead and growing. It recently announced it will expand its "Crane-to-Houston" crude-oil pipeline capacity to 225,000 barrels per day, alleviating a current oversupply of crude oil in the Cushing energy hub in Oklahoma. Magellan says that "the expanded pipeline capacity is fully committed with long-term agreements." That's what we like to hear.

3. Oneok Partners (NYS: OKS)
Oneok Partners brings us out of the petroleum arena and into the booming natural gas sector. The company gathers, processes, stores, and transports natural gas in the U.S. Oneok's assets include 1,290 miles of interstate transmission pipeline, 5,600 miles of intrastate transmission pipeline, and 11 natural-gas underground storage facilities. The company is based in Tulsa and was founded in 1993. By the numbers:

  • Oneok pays a hearty 4.4% distribution yield.

  • The company's payout ratio is 69%. This number, frankly, could be higher from an investor perspective.

  • Oneok's dividend growth over the last five years is 4%, and the five-year average dividend yield is 6.5%.

Like Magellan, Oneok Partners is another company on the move. It recently announced it would increase its already significant investment in the important Bakken Shale to construct a 270-mile natural gas gathering system and related infrastructure. Per the company's website, "Oneok Partners is the largest independent operator of natural gas gathering and processing facilities in the Williston Basin."

And the winner is...
While all three of these MLPs are solid investments, I keep coming back to Oneok Partners. Oneok doesn't have the biggest distribution yield, but its five-year dividend average of 6.5% shows potential for it to come back around into top-level yield territory. The company has also been around the longest of the three. Longevity counts for something in any industry.

But what impresses me the most is the simple fact that Oneok operates in the natural gas sector, which is experiencing an unprecedented boom in volume. As the U.S. moves further and further away from petroleum products, which I believe is inevitable, Oneok is perfectly positioned to cash in on an obvious and plentiful alternative fuel that's available right here in the U.S.

There you are -- three high-yielding, sustainable dividend stocks, courtesy of your U.S. Congress and one of income investing's best-kept secrets: master limited partnerships. Keep an eye out for forthcoming MLP-focused investing columns. In the meantime, if today's read has left you hungry for more great dividend investing ideas, check out this free Motley Fool special report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." The title says it all. Get your copy while it's still available and the stocks are still hot.

At the time thisarticle was published Fool contributorJohn Grgurichloves master limited partnerships so much he wants to marry one, but he owns no shares of any of the companies mentioned in this column. Follow John's Foolish dispatches from the tumultuous front lines of capitalism onTwitter @TMFGrgurich.Motley Fool newsletter services have recommended buying shares of Magellan Midstream Partners, NuStar GP Holdings, and ONEOK Partners. The Motley Fool has a positively gripping disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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