No. of Recommendations: 1


"The tax advantages and higher yields of MLPs do not guarantee their future total return performance, and MLPs are coming off of an extremely strong performance run from 1996-2013 in which they nearly doubled the market’s annualized return. It’s easy for investors to forget about master limited partnerships risks during bull markets.

This table shows the performance of energy MLPs relative to US stocks and bonds from 1981 through 2013. MLPs underperformed US stocks by nearly 3% per year with higher price volatility"

Unlike blue chip dividend stocks and dividend aristocrats, which increase their dividends primarily as a result of earnings growth, most MLPs need to borrow money or issue new units to continue growing their distributable cash flows.

When times were good, MLPs enjoyed easy access to capital because they almost looked like bonds with their stable cash flows and clear returns. Their high yields were also an easy sell to yield-starved investors.


"The collapse of oil prices in 2014-15 has caused many energy master limited partnerships (MLPs) to cut their distributions, and some of them may even become insolvent."

In practice, many MLPs go well beyond this limit, paying distributions out of cash flow or even borrowing to pay distributions when cash flow is inadequate.

That makes them dangerous investments, especially when cash flow can change sharply as a result of, say, declining oil prices. My colleague Alan Gula recently wrote a column about these dangers and the “dividend death watch.”

At the same time, the high yields attract income-seeking investors, whose investments can then be used to finance more acquisitions and pay even higher distributions.

But eventually it all goes wrong, as happened to Linn Energy LLC (LINE) in 2015. LINE had to stop paying distributions, and its stock then lost 95% of its value.

Nevertheless, there are still a number of MLPs with high yields and cash flow that should cover payouts going forward.

Bear in mind that you should expect a higher yield on these companies than on a bond or a conventional company’s distributions, because pipelines and other energy service equipment assets have a finite life. Think of the stock as a 20- to 40-year annuity without assurance of full principal repayment at maturity

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