Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Pipeline MLPs Deliver 7 Percent Yields in a 4.5 Percent Treasury World
Transcript
- Lucas: Luna, I want to talk about a corner of the dividend world that yields north of 7 percent right now, even with the ten-year Treasury at 4.45 and the S&P 500 yielding barely 1.3. I'm talking about midstream energy master limited partnerships — pipeline MLPs. Luna: And the immediate reaction I get from listeners is: 'Wait, aren't those the things that blew up in 2020 when oil went negative? And doesn't the K-1 tax form make them a nightmare?' Lucas: Right, both fair. But here's the thing — midstream is structurally different from exploration and production. These companies own the pipes, the storage terminals, the export docks. They charge a fee for moving molecules, regardless of what oil or gas is trading for. So the revenue is volume-driven, not price-driven. Luna: So you're saying the 2020 panic was more about fear of counterparty defaults and capital access than about the underlying business model being broken? Lucas: Exactly. And since then, the survivors have de-levered, extended debt maturities, and locked in fee-based contracts with minimum volume commitments. Take Enterprise Products Partners — ticker e p d. They've increased their distribution for 25 consecutive years. Current yield is around 7.2 percent. Distribution coverage ratio is 1.7 times. That means they generated 70 percent more cash than they paid out. Luna: That coverage ratio is key. For comparison, a lot of REITs right now are running at 1.0 to 1.2 times coverage, and some consumer staples are barely above 1.0. So MLPs are actually more conservative in that sense. Lucas: And the tax treatment is different. A portion of the distribution is considered return of capital, which means you don't pay taxes on it in the current year — it reduces your cost basis instead. That can be a real advantage if you're in a high tax bracket and holding in a taxable account. Luna: But the K-1 form does add complexity at tax time. You get it later than a 1099, sometimes as late as March or April, and it can delay filing. That's a real friction point. Lucas: It is. And some investors solve that by owning MLPs through a C-corp structure like the Alerian MLP ETF, ticker a m l p, which issues a 1099 instead of a K-1. But you lose some tax efficiency because the C-corp pays corporate-level tax on the distributions before passing them through. Luna: So it's a trade-off. Convenience versus after-tax yield. For someone in a 24 percent federal bracket, the direct MLP might net out better. For someone who hates paperwork, the ETF might be worth the drag. Lucas: Let me give you one more concrete example. MPLX, ticker M-P-L-X, which is the Marathon Petroleum midstream spin-off. Current yield around 7.5 percent. They've grown their distribution at about 5 percent annually over the last five years. And they're spending capital on the Permian Basin takeaway capacity and Gulf Coast export terminals. That's structural demand — associated gas production in the Permian keeps rising, and you can't move it without pipes. Luna: And the macro backdrop right now seems supportive. The ten-year yield has come down from 4.55 to 4.45 in the last week. That spread between MLP yields and Treasuries — roughly 300 basis points — is historically attractive. If rates stay range-bound, investors might rotate into yield assets. Lucas: You know, if today's conversation helped clarify why an MLP might fit in an income portfolio, that's exactly the kind of thing we try to do here. These episodes stay ad-free because of listener support, and if you find it useful, you can help keep it going at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that makes a big difference for us. And we genuinely appreciate it. Lucas: So back to the landscape. One risk to watch is regulatory. The Federal Energy Regulatory Commission — FERC — sets rate of return allowances on interstate pipelines. In 2022, there was a proposal to lower the return on equity, which would have pressured MLP cash flows. That was ultimately softened, but it's a recurring overhang. Luna: Right, and that's why you want to own MLPs with a mix of regulated and unregulated assets. Enterprise Products has about 40 percent of its EBITDA from fee-based contracts that are not subject to FERC rate-setting. That diversifies the regulatory risk. Lucas: Another risk is capital allocation discipline. In the past, MLPs over-invested in growth projects that didn't earn their cost of capital. The post-2020 survivors have been much more disciplined. Enterprise's return on invested capital has been running around 12 percent, which is healthy for an infrastructure business. Luna: So if someone wants to add a 7 percent yielder to their portfolio, are you saying they should start with Enterprise Products Partners and MPLX, or are there smaller names worth considering? Lucas: I'd start with the larger, investment-grade names. Enterprise is rated Baa1 by Moody's. MPLX is also investment grade. They have lower cost of capital and better access to debt markets. A smaller name like Western Midstream, ticker w e s, yields close to 8.5 percent, but it's rated below investment grade and has a higher payout ratio. That's a different risk profile. Luna: And for the investor who wants a pure play without picking individual names, the AMLP ETF yields about 6.8 percent right now and holds 20 to 25 names. The expense ratio is 0.85 percent, which is higher than a broad dividend ETF, but you get diversification and the 1099. Lucas: Right. And I think the key takeaway is this: in a 4.4 percent Treasury world, the premium you get from MLPs — about 300 basis points — is not just compensation for complexity and risk. It's also a reflection of real cash-flow generation tied to energy infrastructure that will be needed for decades. Luna: Even as the energy transition accelerates, natural gas and NGLs are going to be part of the mix for a long time. The pipelines that move them aren't going obsolete anytime soon. Lucas: Exactly. And that's the case for MLP dividends in 2026. For the next episode, I want to look at how international dividend stocks compare — especially European utilities that yield 5 percent with dividend growth that's been accelerating. Luna: Sounds good. Let's dig into that next time.