The Smartest High-Yield Energy Stocks to Buy With $1,000 Right Now


When looking for high-yielding dividend stocks, one of the best places to look is in the energy midstream space. Many of these companies are structured as master limited partnerships (MLP), which pass on their profits to their shareholders and, as such, do not pay corporate taxes.

As a result, most pay very generous distributions, which are similar to dividends, but much of the payout is considered a return of capital. This portion is tax-deferred until the inventory is sold and reduces the owner’s cost basis. This is a nice perk, although it does add some paperwork at tax time.

The medium sector as a whole has seen many changes over the past decade. In the past, firms often had a general partner (GP) and limited partner (LP) structure which was ultimately more beneficial to the GP. The way it worked was that the GPs would own what are called Incentive Distribution Rights (IDRs), while the LP would pay the GP a percentage of their distributions when they reached certain points.

This became very beneficial to the GP because once the MLPs reached a high 50/50 split, the GP would get half of the incremental distribution payment. For example, if a company increased its distribution by $0.02 per unit and that equates to $10 million (500 million units outstanding at $0.02), it would also have to send the GP $10 million of additional dollars under the IDR agreement. This structure also encouraged LPs to fund growth by issuing more equity, since the more units the LP had, the bigger the dollar payouts would be as well.

This structure has generally been eliminated, and as a result, MLPs are in better financial shape, with less leverage and being able to grow their business through free cash flow. However, the stock is surprisingly trading at a discount today compared to where it was trading under the old, unfavorable model. Between 2011 and 2016, MLPs traded at an average multiple of 13.7 in business value-to EBITDA (earnings before interest, taxes, depreciation and amortization), the most common way to value these stocks.

Today, companies in the sector are trading at much lower valuations even though the sector as a whole is in a much better place. This, coupled with the increased demand for power from artificial intelligence (AI) hardware in data centers, creates an excellent buying opportunity. Let’s look at two great MLPs to buy right now.

Despite having some of the best assets in the midrange space with its large built-in system, Energy transfer (NYSE: ET) is one of the cheapest MLPs in the space, trading at a forward EV/EBITDA multiple of 8.5. It currently has a forward yield of 6.4% and expects to increase its distribution between 3% and 5% annually.



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