The Best Pipeline Stocks for Retirement Income


Pipeline Stocks with High Dividends

With oil prices still in the doldrums, investors may have second thoughts when it comes to investing in the energy sector. Still, as we have discussed earlier here at Income Investors, investing in this sector, namely through instruments such as energy stocks and oil ETFs, could still be rewarding. Today, I would like to talk about something a bit more specific: pipeline stocks, particularly pipeline stocks with high dividends.

Pipeline Stocks to Watch for Retirement

Recent years haven’t been the nicest to retirement investors, and this was in part due to the dividend amount that companies were willing to pay, relative to their stock prices. With artificially-low interest rates for most of the last decade, investors rushed towards solid dividend-paying companies. As a result, prices of the well-known dividend payers have already been bid up, and their yield is no longer attractive.

Of course, there are still plenty of companies with generous payouts. But a company’s dividend yield shouldn’t be the only focus for retirement investors; it is also critical to check the company’s dividend durability. While dividends are known to be sticky, there is no guarantee that a company’s payout can continue indefinitely into the future.

So, why do pipeline stocks deserve the attention of retirement investors?

Well, for starters, the pipeline business can be very lucrative. Pipelines are one of the safest and most efficient ways of transporting energy products over land. Once a pipeline is built, it works like a toll road for crude oil and natural gas. Energy companies pay pipeline companies a fixed fee for transporting a certain number of barrels. Some maintenance work needs to be done from time to time but, for the most part, pipelines just sit there, transporting energy products and collecting fees for pipeline companies.

Pipeline companies also benefit from limited competition. Building hundreds of miles of pipeline is not cheap. And, even if you have the money, getting the permission to build a pipeline is no easy endeavor. Just take a look at how long the Keystone XL Pipeline and the Dakota Access Pipeline have been in the news, and you’ll see what I mean.

Furthermore, while oil and gas prices have been volatile, pipeline companies are not drilling new wells. As long as there are energy products to move, pipeline stocks will see money keep coming in.

Another reason for income investors to check out pipeline stocks is their oversized dividends. Some pipeline stocks are organized as master limited partnerships (MLPs). An MLP can trade on U.S. stock exchanges just like any other stock, but it doesn’t have to pay any income tax at the corporate level. In return, MLPs are required to distribute almost all their profits to investors as dividends.

Therefore, oil and gas pipeline stocks can be great for income investors. However, like most investments, they are not risk-free. In particular, natural gas and oil pipeline companies could still face some level of commodity price risk and, if they have too much capital expenditures, dividends could be at risk after a couple of bad quarters.

At the end of the day, in order for dividend investors to get paid, the companies need to generate enough cash from their operations. Borrowing money to fund dividend payments might work in the short term, but it is not a sustainable strategy for the long run. As retirement investors, it’s important to check whether those high-dividend oil stocks have the ability to generate enough cash to cover their dividend payments. In the case of MLPs, a key metric to look for is the distribution coverage ratio.

Now, let’s take a look at the best oil pipeline stocks for retirement investors.

List of Pipeline Stocks for Retirement

Company Name Ticker Symbol Dividend Yield
Genesis Energy, L.P. GEL 9.21%
Blueknight Energy Partners LP BKEP 8.47%
Buckeye Partners, L.P. BPL 7.35%
Williams Partners LP WPZ 5.82%
Magellan Midstream Partners, L.P. MMP 4.72%
Enbridge Inc ENB 4.32%
Shell Midstream Partners LP SHLX 3.64%

Pipeline Stocks 2017

1. Genesis Energy, L.P.

High-dividend stocks are not known to be the safest bets, but investors may want to make an exception for Genesis Energy, L.P. (NYSE:GEL).

Genesis Energy is a growth-oriented MLP. Headquartered in Houston, Texas, the partnership operates through four segments: offshore pipeline transportation, refinery services, marine transportation, and supply and logistics. With an annual yield of 9.21%, it is one of the highest-yielding pipeline stocks on the market.

The partnership’s 850 miles of onshore pipelines are mainly used to transport crude oil and CO2, while it also has 250 miles of offshore pipeline in the Gulf of Mexico, moving both oil and natural gas.

With the downturn in oil and gas prices, many energy companies have fallen deep into the doldrums. Some have even cut their dividends. Genesis Energy, however, was actually raising its payout during this period.

The most recent distribution increase came on April 11, when the partnership announced a 7.1% year-over-year increase to its quarterly distribution rate to $0.72 per unit. The announcement marked the 47th consecutive quarter in which Genesis has raised its payout. (Source: “Genesis Energy, L.P. Increases Quarterly Distribution,” Genesis Energy, L.P., April 11, 2017.)

2. Blueknight Energy Partners LP

Blueknight Energy Partners LP (NASDAQ:BKEP) is a midstream MLP headquartered in Oklahoma City. The partnership owns and operates a diversified portfolio of midstream energy assets. The portfolio includes 895 miles of pipeline, 17.6 million barrels of crude oil and petroleum product storage capacity, around 240 crude oil transportation and oilfield services vehicles, and 54 liquid asphalt cement terminals and storage facilities.

It wasn’t always sunshine and rainbows for this pipeline stock, but Blueknight’s most recent earnings report contained some good news. In the first quarter of 2017, BKEP earned a net income of $3.5 million on total revenues of $46.3 million, a sizable improvement from the net income of $0.7 million on revenues of $41.0 million in the year-ago period. More importantly, the partnership’s distributable cash flow increased 20% year-over-year to $10.3 million. (Source: “Blueknight Announces First Quarter 2017 Results,” Blueknight Energy Partners LP, May 3, 2017.)

The partnership has a quarterly distribution rate of $0.1450 per common unit. At today’s price, BKEP has an annual dividend yield of 8.47%.

3. Buckeye Partners, L.P.

Regular readers of this column know that I’m a big fan of Buckeye Partners, L.P. (NYSE:BPL). This MLP is not affiliated with any big-name energy company, but is one of the best oil pipeline stocks on the market.

Buckeye Partners owns and operates approximately 6,000 miles of liquid petroleum products pipelines, serving more than 100 delivery locations. Moreover, the partnership has a huge terminal network with total storage capacity of over 115 million barrels.

The best part about this pipeline stock is its distributions. Buckeye became an MLP in 1986 and has been paying uninterrupted dividends ever since. In the past 10 years, Buckeye’s quarterly distribution rate has increased 56%. Consistently increasing distributions is one of the best things for retirement investors.

With a quarterly distribution rate of $1.25 per unit, this pipeline stock is yielding 7.35%.

4. Williams Partners LP

Other than crude oil pipeline stocks, income investors may also want to check out natural gas pipeline stocks like Williams Partners LP (NYSE:WPZ).

Williams Partners is a natural gas infrastructure partnership with a major presence in key supply basins in the U.S. It owns and operates more than 33,000 miles of pipeline, which provides natural gas for clean power generation and heating, as well as industrial use.

Note that energy company Williams Companies Inc (NYSE:WMB) owns approximately 74% of the MLP.

Just like the best oil pipeline stocks, this natural gas pipeline MLP focuses on growing its fee-based business. In the first quarter of 2017, Williams Partners generated adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of $1.117 billion, representing a 5.4% increase year-over-year. Its $752.0 million in distributable cash flow provided 1.33 times coverage of its quarterly distribution. (Source: “Williams Partners Reports First-Quarter 2017 Financial Results,” Williams Partners LP, May 3, 2017.)

Williams Partners LP is currently yielding a decent 5.82%.

5. Magellan Midstream Partners, L.P.

Magellan Midstream Partners, L.P. (NYSE:MMP) is in the business of transporting, storing, and distributing refined petroleum products and crude oil. Headquartered in Tulsa, Oklahoma, Magellan owns the longest refined petroleum products pipeline system in the United States. The system has access to nearly 50% of the country’s refining capacity. Moreover, Magellan’s storage facilities can store around 100 million barrels of petroleum products, such as crude oil, gasoline, and diesel fuel.

As an MLP, Magellan pays quarterly distributions with a current annual yield of 4.72%. Over the past 10 years, the partnership’s annual payout has increased 175%. (Source: “Cash Distributions,” Magellan Midstream Partners LP, last accessed May 8, 2017.)

The current commodity price environment is not the best for energy companies, but Magellan is still growing its business. In the first quarter of 2017, Magellan generated $227.6 million in distributable cash flow, representing a 10.9% increase from the year-ago period. (Source: “Magellan Midstream Reports Higher First-Quarter Financial Results,” Magellan Midstream Partners LP, May 3, 2017.)

Going forward, Magellan expects to increase its cash distributions by eight percent in both 2017 and 2018 while maintaining a distribution coverage ratio of 1.2 times.

6. Enbridge Inc

Enbridge Inc (NYSE:ENB) is an energy delivery company headquartered in Calgary, Alberta. Enbridge is a familiar name to Canadian consumers because it’s the largest gas distribution utilities business in the country. The company might not make headlines in the U.S. very often, but it does have a huge midstream presence in the country.

Enbridge operates the largest and the most complex liquids pipeline system in the world. The system is responsible for transporting approximately 60% of U.S. crude imports from Canada. The company also has strategically located gas pipelines transporting around 20% of natural gas in North America.

One of the reasons to consider Enbridge is its stable and predictable cash flows. Approximately 96% of the company’s cash flow come from take-or-pay or equivalent contracts. A low-risk business model is key to income investing in the energy sector.

Earlier this year, the company increased its dividend by 10% to $0.583 per share. That translates to an annual dividend yield of 4.32% at today’s price. With a number of growth projects in execution and under development, Enbridge expects to deliver 10% to 12% annual dividend growth from 2018 through 2024.

7. Shell Midstream Partners LP

With an annual yield of 3.64%, Shell Midstream Partners LP (NYSE:SHLX) might not stand out among the high-dividend oil stocks. However, this MLP is still worth considering for income investors.

Shell Midstream Partners LP is a fee-based, growth-oriented midstream MLP formed by Royal Dutch Shell plc (NYSE:RDS.A). Headquartered in Houston, Texas, the partnership was created to own, operate, develop, and acquire midstream assets such as pipelines. Its current assets include pipelines, crude tank storage, and terminal systems.

The partnership recently raised its quarterly distribution to $0.2910 per limited partner unit, representing a 5.1% increase sequentially and a 23.8% increase year-over-year. Since the partnership went public in October 2014, it has raised its payout every single quarter. (Source: “Shell Midstream Partners, L.P. Declares 5.1% Increase in Quarterly Distribution,” Shell Midstream Partners LP, April 20, 2017.)

Shell Midstream Partners also managed to generate enough cash to support its rising payout. In the most recent quarter, the partnership achieved a distribution coverage ratio of 1.4 times. (Source: “Shell Midstream Partners, L.P. 1st Quarter 2017 Unaudited Results,” Shell Midstream Partners LP, May 5, 2017.)

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