Magellan Midstream Partners: A 5% Income Stream to Consider
1 Dividend Stock to Retire On
Today’s chart highlights some of the best dividend stocks around for earning big yields: pipelines.
Pipelines don’t get a lot of coverage in the press. These firms, though, make for lucrative investments. And because they pass on most of their profits to owners, some of these names pay out yields between four and eight percent.
Take Magellan Midstream Partners, L.P. (NYSE:MMP), for instance. This firm owns 13,000 miles of oil and gas pipelines across the Midwest. And while I doubt many of you have heard of it, this partnership is one of my favorite income names for a couple of reasons.
To begin with I love the steady cash flows. And Magellan doesn’t have that much exposure to commodity prices; it acts more like a tollbooth, earning a fee on each barrel of crude that flows through its network. While oil prices can swing wildly from year to year, the actual volume of crude running through these pipes remains fairly stable over time.
This network almost always runs at full capacity, cranking out profits for owners. Surging U.S. oil output means we don’t have enough infrastructure to move crude from wellheads to refineries. To ensure their place in the line, oil drillers will commit to long-term contracts with pipeline owners. We can project how much money Magellan will earn for years to come and mark on the calendar when partners will get paid.
Better still, it’s a great business. Keep in mind that a pipeline doesn’t cost a lot of money to run. You don’t need to spend that much on labor, repairs, or maintenance. Once underground, they just sit there, earning profits for owners.
It would cost billions to build a rival line. And even if you can cough up that kind of dough, government officials would hesitate to grant the rights-of-way for construction. These barriers to entry allow Magellan to crank out oversized profits without rivals eating into margins.
You can see this monopoly position in the partnership’s financial results. For decades, Magellan has enjoyed double-digit returns on invested capital. Only a handful of firms in the world can generate these kinds of numbers year after year. This has translated into a tidy income stream for unitholders.
Since 2001, Magellan has passed on 51 distribution hikes. Over that time, the payout has grown by 12% on average each year. Today, the trust pays a quarterly distribution of $0.86 per unit, which comes out to an annual yield of 4.7%.
This payout, mind you, has rolled in through thick and thin. Low oil prices have forced many drillers to slash dividends, blowing a hole in retirees’ incomes. Magellan, though, soldiered through, mailing out checks to investors.
As you can see in the chart below, this three-part formula has paid off for owners.
I expect these returns to keep rolling in. Management continues to grow earnings through acquisitions, tariff hikes, and building new pipelines. That distribution, based on executive guidance, should grow at a high single-digit clip over the next few years.
Bottom line: hot tech stocks tend to dominate business headlines. Pipelines, though, have quietly delivered some of the best returns around. If you want to lock in a reliable income stream, take a second look at Magellan Midstream Partners, L.P.
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