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 Quick Quote 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.