Master Limited Partnerships (MLPs) stand out as a potent investing strategy, transcending the allure of popular growth stocks and mega-cap tech names. These unique investment structures, characterized by their partnership format, offer investors not only an above-average income but also the potential for significant price appreciation.
The structure of an MLP involves a general partner managing the partnership, with individual investors functioning as limited partners. A distinctive feature of MLPs is their obligation to distribute profits directly to shareholders, resulting in larger dividends due to their exemption from corporate taxes. The income from MLPs is allocated among partners based on their ownership stakes.
The advantages of investing in MLPs are manifold. These high-yield, high-quality vehicles have consistently delivered favorable returns. Numerous, albeit lesser-known, MLPs have maintained a track record of incrementally increasing their dividends, thus providing high returns. They are exempt from income taxes and are traded on major stock exchanges. Despite their merits, MLPs often escape the spotlight in financial media.
MLPs offer a tax advantage, where 80-90% of their distributions are treated as a return of capital. This allows investors to defer taxes on gains for years until they sell their shares. This favorable tax treatment has attracted a diverse array of companies across various industries.
Investing in companies that regularly increase dividends is a reliable predictor of future earnings growth. Corporate directors, with intimate knowledge of their companies’ financial status and prospects, will only raise dividends if they are confident of sustaining higher payouts with future earnings growth. A pattern of rising dividends often signals robust, expanding businesses.
Focusing on a top-performing MLP, we find Sunoco SUN, a Master Limited Partnership that has consistently raised its dividends. Sunoco, involved in distributing motor fuel to a vast network in the U.S. and operating in real estate and terminal facilities, exhibits strong business and sustainable cash flows, driving its share price upward. Sunoco is one of the largest motor fuel distributors in the United States.
Sunoco, a dividend achiever, has steadily increased its dividend for over a decade, currently offering a dividend of $3.37/share (7.04%). Trading at a forward P/E of 11.31, Sunoco’s stock presents value, having reached 52-week highs and showing more than a 16% increase year-to-date. A longer-term chart reveals a consistent upward trend since the pandemic lows.
Analysts have recently revised SUN’s earnings estimates upward by 66.67% for the fourth quarter, with the Zacks Consensus Estimate now at $1.05/share. This reflects a potential 150% growth compared to the same quarter last year.
The case for MLP investing is compelling. The combination of regular income and potential for price appreciation makes MLPs a worthy consideration for individual investors seeking to diversify their portfolio.
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