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This Underappreciated Investment Is Yielding Over 7%

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One of the best investing strategies available has nothing to do with popular growth stocks or the mega-cap technology names. This dividend strategy not only provides investors with above-average income, but as we’ll see, it also has the ability to produce significant price appreciation. I’m talking about Master Limited Partnerships (MLPs).

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.

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.

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.

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 a highly-ranked MLP that has consistently raised dividends. This MLP is a component of the Zacks Oil & Gas – Refining and Marketing – Master Limited Partnerships industry group, which ranks in the top 20% of all Zacks Ranked Industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform the market over the next 3 to 6 months.

Historical research studies suggest that approximately half of a stock’s future price appreciation is due to its industry grouping. By focusing on stocks within leading industries, we can dramatically improve our odds of success.

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. Headquartered in Dallas, TX, Sunoco also leases real estate properties and operates terminal facilities on the Hawaiian Islands.

Sunoco’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.

A Zacks #1 (Strong Buy), SUN has not decreased its dividend since its founding; the company’s current dividend yield is 7.28%. Trading at a relatively undervalued 10.53 forward P/E, SUN has exceeded earnings estimates in two of the past four quarters, averaging a positive earnings surprise of 21.57% over this timeframe. In addition to the dividend yield, this MLP has provided investors with a stellar 285% return off the 2020 pandemic lows.

StockCharts
Image Source: StockCharts

Analysts covering SUN have increased their fiscal 2024 earnings estimates by 41.45% in the past 60 days. The Zacks Consensus Estimate now stands at $4.30/share. Sales are expected to climb 10.21% to $25.4 billion during the year.

Zacks Investment Research
Image Source: Zacks Investment Research

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 MLPs to your portfolio mix.

Disclaimer: Sunoco is a long-term holding within the Zacks Income Investor portfolio.

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