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Forget Fixed Income: Add This Tax-Advantaged Investment Vehicle Instead

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While the diversification benefits of investing in fixed income securities are substantial over time, it’s difficult to justify investing in bonds in the current environment with yields set to rise and inflation eating away at any nominal return. Contrary to conventional wisdom, the opportunity still exists for investors to create a reliable stream of income from the equity markets. There are several dividend strategies that the best investors incorporate into their investment mix including blue chip dividend-paying stocks, real estate investment trusts (REITs), and Master Limited Partnerships (MLPs).

Investing in companies that have a history of raising dividends can be a very reliable indicator of future earnings growth. Corporate directors know far better than anyone else the details and financial condition of their companies, including the outlook for future earnings growth. Management will only raise dividends if they have every reason to believe that future earnings growth will be able to sustain higher dividend payouts. A steady trend of rising dividends can alert investors to healthy, growing businesses. We’re going to focus on 3 MLPs that have consistently raised dividends.

Due to their favorable tax treatment, this type of high-yield, high-quality investment vehicle has been providing investors with favorable returns for many years. There are countless and relatively unknown MLPs that have consistently raised their dividends over a long timeframe, providing investors with high returns. MLPs do not pay income taxes and trade on major stock exchanges.

MLPs are different than other traditional investment structures – they are partnerships. A general partner is responsible for running the MLP, and individual investors serve as the limited partners. MLPs must pay their profits directly to shareholders and pay much bigger dividends because they pay no tax. The income generated from the MLP is allocated amongst all partners in proportion to their ownership interest.

Relative to dividend-paying stocks, MLPs are relatively unknown and are largely ignored by the financial media. MLPs are able to sidestep the IRS and pass their earnings directly to shareholders making them the ideal investment for individual investors.  

Investing in MLPs also comes with a special tax benefit for MLP dividends which are referred to as distributions. The IRS considers 80-90% of MLP distributions as a return of capital, which means investors can defer taxes on their gains for many years until they sell their shares. MLPs have attracted a diverse set of companies in many industries due to their favorable tax treatment.

Below we will analyze three MLPs within the Zacks Oil & Gas – Refining and Marketing – Master Limited Partnerships industry group. This industry group is ranked within the top 7% of all Zacks Ranked Industries. Energy is also leading the charge in the first few trading days this year and was the #1 S&P sector last year.

Sunoco LP (SUN - Free Report)

Sunoco is a Master Limited Partnership that distributes motor fuel to approximately 10,000 convenience stores, independent dealers, commercial customers, and distributors in more than 30 U.S. states. Founded in 2012 and headquartered in Dallas, TX, Sunoco also leases real estate properties and operates terminal facilities on the Hawaiian Islands.

A Zacks #2 Buy stock, SUN has not decreased its dividend since its founding; the company’s current dividend yield is 8.03%. Trading at a relatively undervalued 8.35 forward P/E, SUN has exceeded earnings estimates in four of the past six quarters. SUN is averaging a positive earnings surprise of 47.31% over the past four quarters, supporting its climb of nearly 60% in the past year.

Sunoco LP Price, Consensus and EPS Surprise

Sunoco LP Price, Consensus and EPS Surprise

SUN’s distribution networks reflect a strong business and sustainable cash flows which will continue to drive the share price. Sunoco is among the largest motor fuel distributors in the United States. SUN expects fuel volumes for 2021 to have totaled approximately 7.75 billion gallons, rising from the 7.09 billion in 2020.

Analysts covering SUN have increased their full-year earnings estimates by 1.1% in the past 60 days. The Zacks Consensus Estimate for 2021 EPS now stands at $6.41, an astounding 743.42% growth rate relative to last year. SUN is scheduled to report earnings on February 16th.

Global Partners LP (GLP - Free Report)

Global Partners is engaged in the purchasing, selling, storing, and logistics of transporting gasoline, distillates, oil, renewable fuels, and propane to a wide array of customers in the New England region and New York. Founded in 2005 and based in Waltham, MA, Global Partners has a portfolio of over 1,548 owned, leased, or supplied gasoline stations.

GLP has surpassed earnings estimates in 15 out of the last 19 quarters. A Zacks #2 (Buy) stock, this MLP trades at a reasonable 13.79 forward P/E and has a current dividend yield of 9.53%. GLP has posted a trailing four-quarter average earnings beat of +13.4%, most recently beating by +38.71% when the company delivered EPS of $0.86 back in September. GLP has climbed by over 60% in the past year.

Global Partners LP Price, Consensus and EPS Surprise

Global Partners LP Price, Consensus and EPS Surprise

Looking into 2022, GLP revenues are anticipated to grow by 25.53% compared to 2021. In the past 60 days, earnings estimates for next year have increased by 28.68%. The Zacks Consensus Estimate for 2022 EPS sits at $1.75, which would represent 56.25% growth relative to last year. GLP is slated to announce quarterly earnings on March 4th.

Phillips 66 Partners LP

Phillips 66 Partners is an energy company that owns, operates, develops and acquires midstream assets. The company offers transportation, processing, storage, and fractionation of crude oil, petroleum products, and natural gas liquids. PSXP was founded in 2013 and is headquartered in Houston, TX.

PSXP has never decreased its dividend since its founding; the MLP’s current yield is 9.22%. The company is relatively undervalued, trading at a 9.24 forward P/E. PSXP most recently reported EPS of $1.00 in October of last year, a 1% positive surprise over consensus. The stock is up nearly 67% in the past year.

Phillips 66 Partners LP Price, Consensus and EPS Surprise

Phillips 66 Partners LP Price, Consensus and EPS Surprise

With a Zacks #2 ranking, Phillips 66 Partners is least exposed to price fluctuations in commodities as it generates stable fee-based revenues under long-term contracts from its diverse base of midstream energy assets across the United States. The partnership’s cash flows are highly stable and predictable which should further support its share price.

The Zacks Consensus Estimate for 2022 EPS sits at $4.11, which would translate to growth of 51.1% versus last year. PSXP is scheduled for its next earnings report on February 4th.

It’s clear that MLP investing is something that every individual investor should consider. The steady stream of income along with the potential for price appreciation warrant a closer look into adding these MLPs to your portfolio mix.


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