Market volatility often boosts investor interest in companies with consistent income flows in the form of dividends.
For many financial advisors, a vehicle of choice to achieve some ballast in client portfolios is the master limited partnership. Investors can enjoy tax benefits that are similar to those of REITs. Also like REITs, MLPs trade exactly like stocks and are listed on U.S. exchanges.
For an MLP to get the benefit of paying no income taxes, 90% of its income must come from natural resources-related business activity, or real estate.
As such, many oil-and-gas related companies are structured as MLPs.
The oil-and-gas pipeline industry is home to several such entities with high dividend yields. Some of these energy-transport MLPs have become popular among advisors looking to get clients into some income-producing vehicles.
Enterprise Products Partners (EPD) is a Houston-based natural-gas pipeline operator. On August 9, the company reported better-than-expected second-quarter results. In the statement accompanying the earnings release, CEO Michael Creel said results were driven by natural gas, natural gas liquids and crude-oil production growth, as well as stronger demand for natural gas liquids.
EPD boasts a dividend yield of 5.6%. For growth investors, the solid sales increases and price appreciation are also attractive.
Enterprise Products plunged in the overall market selloff, but rebounded on the strength of its earnings, as well as the buying spree that hit the indices on Thursday and Friday.
The company's shares regained the key 10-week moving average in heavy upside volume last week. For the year, shares have more or less flat lined, showing a gain of 3.22%.
An industry peer that's also a favorite of many advisors is Enbridge Energy Partners (EEP), another pipeline operator that's headquartered in Houston. It has a much smaller market cap of $6 billion.
This name will be less appealing to pure growth investors, since it has a track record of earnings declines in the past four quarters. Wall Street expects a profit decline for 2011, but a rebound to 15% earnings growth in 2012.
For many income investors, the dividend yield of 7.4% offsets a year-to-date price decline of 7.92%. Also appealing is the underlying industry potential. Even with price swings in the underlying commodity, natural gas still needs to be transported. So these fee-based companies will continue collecting their toll-road revenue even as commodity traders send prices higher or lower.
Another small natural-gas pipeline MLP with a good price appreciation plus a solid dividend yield is Western Gas Partners (WES). Shares are up nearly 14% year-to-date, and the stock sports a yield of 4.7%.
The stock is another that rebounded following a selloff along with the broader indices. Its market cap is $2 billion, and it trades about 725,000 shares a day.
Earlier this month, Western reported an 11% year-over-year gain in quarterly earnings, and a 29% increase in quarterly revenue.
Western Gas was spun off from Anadarko Petroleum (APC) in 2008. Anadarko still maintains a significant ownership stake.
Western saw strong price run-ups in 2009 and 2010. Wall Street sees moderate earnings growth in 2011 and 2012, of 7% and 10% respectively. Those are not the explosive growth levels generally seen in the market's best price leaders, but indicate Wall Street's confidence that the company will continue operating in the black.
Oneok Partners (OKS) is yet another oil pipeline MLP that plunged in the market selloff and then rebounded. Shares were trading slightly below their 10-week moving average on Friday.
The Tulsa-based company's dividend yield is 5.5%. Earnings grew 100% and 81% in the past two quarters on revenue growth of 13% and 35%.
The earnings outlook for Oneok is bullish for this year, with analysts eyeing EPS of $2.44 per share, a year-over-year gain of 39%. But a profit decline of 2% is expected next year.
Oneok has been investing in projects to bolster its presence in the natural liquid gas transport business. Those investments include projects in the Bakken shale region in Montana and North Dakota. Last year, Oneok announced that it would build pipelines and other facilities in the area. Analysts believe the investment will result in improved cash flow for Oneok.
These natural gas pipeline MLPs are not exciting, fast movers like some of the hot, new growth names. But the dividend yields, along with a general tendency to show stable price action, can give these stocks a place alongside more typical fast-growers for investors wanting to add some balance to their portfolios.