Monitor This Dividend-Paying Theme

 | Jun 26, 2013 | 11:00 AM EDT
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Dividend paying stocks have come in a lot in recent weeks. The "bond equivalent" sectors have led declines. Vanguard Utilities ETF (VPU) has declined 11%. Consumer Staples Select Sector SPDR (XLP) has declined by nearly 7%. And the Vanguard REIT Index ETF (VNQ) has declined by over 14%.

But one popular dividend-paying theme hasn't come in yet: pipeline master limited partnerships (MLPs). Like many dividend payers, they've had quite a run in 2012 and early 2013. But unlike the others, pipelines are still riding high and are well above most historic valuations. The Alerian Pipeline MLP Index (^AMZ) has not even come down 4%. True, domestic pipeline companies have a great bullish story, but you should still hold off on adding most pipeline MLPs. Below are three of my favorites, only one of which has come in significantly.

MarkWest Energy (MWE) is the pipeline for you if you believe in the domestic natural gas consumption story. It is a major transporter of natural gas from the Marcellus Shale, which is the richest acreage on the continent. In addition, the company has a newer business segment in Oklahoma and Texas. MarkWest is a very concentrated play and the company known for its customer satisfaction.

MarkWest Energy's dividend yield
Source: YCharts

But the stock has only come in a little. In these charts I'm going to look at distributions. Since most pipelines distribute much of their distributable cash flow (DCF) to unit holders, the dividend yield can double as a sort of earnings yield as well. MarkWest Energy's yield has increased, but not by much. It's only at about a six-week high. Wait until this yield gets up to 6% before dipping in.

If MarkWest is the gas pipeline MLP, Plains All-American Pipeline (PAA) is the one for crude oil. Its market is a great one: despite falling crude demand in North America, there is an ocean of crude exports for Plains to displace. A long-term compounded growth rate between 7 and 8% is testament to that. Note also their interesting growth model: Plains acquires and doesn't do large, multi-year projects. It's too risky and this market changes too fast. 

Plains All-American Pipeline (PAA) dividend yield
Source: YCharts

In yield, Plains's story is much the same as MarkWest Energy's. The yield is up, but not nearly enough to be a margin of safety. A yield of 4.75% seems to be where the stock hits its floor. Be patient.

Kinder-Morgan Energy Partners (KMP) is the one pipeline that can be dipped into right now. It is the first and largest pipeline MLP, with arguably the best assets. Its CO2 business is lucrative and unique among major pipelines. The company owns the only pipeline in Canada that connects the oilfields of Alberta to the export terminal in British Columbia. It is also the largest transporter of natural gas in the U.S.

TSC Pipeline Dividends Comparison
Source: YCharts

Right now, KMP is OK to buy -- as long as its dividend yield is around 6.4%. As of Monday, the yield was at a seven to eight month low. As you can see on the chart above, it has come in much more than the other pipeline MLPs and is the only one trading at an optimal purchasing point right now.

Dividend stocks have been hit hard lately, but pipeline MLPs have remained above the fray. Yet while the long-term story for pipelines is good, investors should drag their feet on these plays for now. And, most of all, remain cautious.

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