Dividend investing is popular again. Investors have taken to heart Jeremy Siegel's studies showing that higher-yielding stocks tend to offer greater returns over time than stocks that offer low or no yields do.
One particular area that has garnered interest over the years is master limited partnerships. Investors are drawn to MLPs for their high yields and tax deferment. MLPs don't pay taxes at the corporate level, so the tax burden then gets passed to the investor. Without getting into too much detail, because of the structure of the partnerships and the distributions, investors are entitled to a serious tax deferral. Investors should fully understand what they are in for before buying MLPs, but for those willing to do the research, it can be very profitable.
The highest yields can be very tantalizing. As long as a stock yielding 15% doesn't see its share price fall, you'll make 15% in one year! In more cases than not, however, an astronomical yield is a bad sign for a stock. Since yields and stock prices move in opposite directions, a high yield usually means that investors have begun to worry about the business and driven down its stock price.
However, certain types of companies, such as MLPs, have to pay out most of their cash flow as distributions, so their yields will be higher than "normal." Dividends are not guaranteed; you need to make sure that a business is generating enough cash to pay its dividend, or your investment could be disastrous.
I ran a screen for the highest-yielding MLPs. The only limitation I've set is that the MLPs must have a market cap greater than $1 billion.
Here are the top 25 highest-yielding MLPs the screen produced.
Market Cap (millions)
Northern Tier Energy
Natural Resource Partners
Breitburn Energy Partners
Eagle Rock Energy Partners
Suburban Propane Partners
Crestwood Midstream Partners
Atlas Resource Partners
Boardwalk Pipeline Partners
Regency Energy Partners
Energy Transfer Partners
Enbridge Energy Partners
NGL Energy Partners
Rentech Nitrogen Partners
PAA Natural Gas Storage
Teekay Offshore Partners
Alliance Resource Partners
Source: S&P CapitalIQ
These stocks are a good place to start your research, but they're not formal recommendations.
Let's take a look at the top three:
1. Northern Tier Energy
First up is Northern Tier Energy with a trailing yield of 16.2%. Northern Tier Energy is a hybrid MLP which owns a refinery as well as a network of owned and franchised gasoline stations. Northern Tier Energy is benefiting from the large price differential between what oil is selling for in the Midwest, which is even lower than the WTI, and the price of gasoline and other refined products whose prices are reflective of the international price of oil.
Northern's refinery lies along two pipelines, both owned by Enbridge: One comes into the U.S. from Canada while the other comes from the Bakken Shale in North Dakota. Northern's refinery has been earning crack spreads that have continued to rise to nearly $38 per barrel, which is absurdly high. The MLP's payouts are highly correlated to the company's crack spreads. Efforts are under way around the country to change the pipeline network to mitigate the large spread between the price of WTI and the price of Brent crude. As these efforts move forward in the next year or so the price differential should decrease and with it so will Northern's payouts. If you are looking for stable quarterly payouts then pass on Northern Tier.
2. QR Energy
Second up is QR Energy with a yield of 11.2%. QR Energy is an upstream MLP which owns oil and gas fields in Texas, Louisiana, and Michigan. The partnership currently pays a quarterly distribution of $0.4875 and has production 95% hedged for 2013 and at least half of production hedged until 2016.
QR Energy is down as of late for two reasons. One, management has said that they don't believe the quarterly distribution will be raised this year. The second issue weighing on the stock is management's incentive structure. Without getting into tons of details, QR management was able to take an incentive distribution of 6.1 million shares in the fourth quarter for a value of roughly $100 million-$120 million, and it will be able to take sizable incentive distributions every 4th quarter as long as the MLP has paid out at least $0.4744 for the past four quarters. Investors in QR Energy should be keenly aware of management's incentive structure and how it can affect investors. Fellow Fool Sean Williams believes QR Energy will outperform in the long run, but I'm withholding judgment for now.
3. Natural Resource Partners
Third is Natural Resource Partners with a yield of 9.95%. Natural Resource Partners owns sizable coal assets and has been diversifying into infrastructure, natural gas, and oil as coal has been beaten down in the U.S. Natural Resource Partners' saving grace so far has been metallurgical coal, which has not seen as big a drop in price as steam coal. Still, Natural Resource Partners distributable cash flow fell 12% year over year to $246 million, putting its distribution coverage ratio right at one. Should coal prices continue to fall, or if there is a slowdown in China that affects metallurgical coal prices, Natural Resource Partners could possibly have to lower its dividend. On the other hand, should coal prices rebound, Natural Resource Partners, as well as fellow coal MLP and number 25 on our list, Alliance Resource Partners, will be sitting pretty.
Foolish bottom line
Remember, their seemingly irresistible yields could be ticking time bombs, so do your own due diligence. Also, make sure you diversify your picks across various sectors. As investors relearn every decade or so, you never want to put all your eggs in one basket -- no matter how tempting the dividends.
If you're on the lookout for high-yielding stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.
The article The 25 Highest-Yielding MLPs in March originally appeared on Fool.com.
Dan Dzombak has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.