4 Top MLP Dividend Stocks to Consider Buying Now

Yield-hungry investors don't have that many compelling options these days. Thanks to low interest rates, CDs and bonds don't pay very well, unless you're willing to take on an extra helping of risk and invest in a junk bond. Meanwhile, many high yield stocks are very risky.

That said, one potential place where you can lock in a compelling income stream without taking on excessive risk is by investing in master limited partnerships. These entities tend to pay well because they generate steady cash flow from long-term contracts supporting the oil and gas pipelines and related infrastructure they operate.

Investors have many options when it comes to investing in MLPs. For those seeking safety, there are several top-tier companies worth buying to collect a steadily growing income stream. But for those who want more yield today, the biggest payouts tend to come from smaller packages.

While these four aren't necessarily the highest-yielding MLPs in the sector, they are the top income options worth considering since each has many of the crucial financial characteristics needed to maintain their currently lucrative payouts such as:

  • Getting more than 90% of their cash flow from stable fee-based assets
  • Having a low leverage ratio of less than 4.0 times debt to EBITDA
  • Possessing a distribution coverage ratio of at least 1.0

On top of that, each has the potential to grow their payouts in the future as they build and buy more cash flow-generating assets.

Income on sale

Buckeye Partners has lost nearly 30% of its value this year. While that highlights the risk associated with investing in a smaller MLP, the sell-off also enables investors to scoop up a more than 11% current yield. One reason Buckeye's value has declined this year is due to some deterioration in its financial metrics. Its distribution coverage ratio has fallen from 1.09 times in 2016 to 1.03 times over the past 12 months, including a dangerously low 0.98 times last quarter, which means it paid out more than it brought in. In the meantime, its leverage ratio went from 4.1 times last year to 4.5 times as of the end of the third quarter.

However, this weakness should be temporary because the company recently bought a 50% stake in a large global oil terminal business, which should bolster earnings in the coming years. In addition, it has several other expansion projects underway across its legacy business that should also provide some incremental cash flow. Those growing cash flow streams, when combined with the fact that 98% of Buckeye's earnings come from stable fee-based sources, suggest that the MLP's lucrative payout should soon be back on firmer footing while future expansions could drive it even higher.

Get paid well to wait

Crestwood Equity Partners' payout is already on a solid foundation. While the company only currently gets about 85% of its cash flow from stable sources, it has a nice margin of safety since it covered the distribution with cash flow by 1.2 times last quarter, and expects coverage between 1.2 and 1.4 times in 2017. Meanwhile, leverage was 4.1 times last quarter, which while just shy of its long-term target of less than 4.0 times, the company should hit that goal shortly since it recently agreed to sell a noncore business for $225 million in cash.

In addition to its sound financial profile, Crestwood has several growth projects under construction that should fuel significant earnings growth in the coming years. According to Crestwood's forecast, its current projects will add $30 million in annual incremental cash flow in 2018, with that number rising to $75 million by 2020. That's significant growth for a company that expects to generate $210 million to $230 million in distributable cash flow this year and fuels Crestwood's belief that it can start increasing its already lucrative distribution in the second half of next year.

Breathing room coming down the pipeline

EnLink Midstream Partners currently pays out all its cash flow each quarter to support its generous distribution, which doesn't leave it with any margin for error. It does, however, have a solid balance sheet since leverage was 3.7 times last quarter, which was within its target range of 3.5 to 4.0 times. That strong financial position is buying the company the space it needs while it waits for its current slate of growth projects to start generating cash flow and giving it a bit more breathing room. Once it reaches a more comfortable level, future expansions should enable EnLink to grow its payout over the long term. While it will be several quarters before it reaches that point, investors can collect a compelling income stream while they wait for that upside.

Waiting for the weight to lift

Summit Midstream Partners' payout appears to be on solid ground. Driving that view is the fact that the company currently covers its distribution by 1.17 times, and has a comfortable 3.2 times leverage ratio while getting 99% of its earnings from stable fee-based sources. Despite those numbers, it lost about 25% of its value this year, which is one reason it yields an eye-catching 12%.

One of the weights pulling it down is a deferred payment it owes its parent company at the end of 2020 to pay off an acquisition from last year. In a sense, the company is benefiting from that deal without having to pay for it yet. However, the overhang of that payment seems to be weighing on units even though it has more than enough liquidity to pay it off now and has several financing options at its disposal to secure the necessary funds. While this payment will likely continue to hold down Summit's valuation in the near term, investors get paid well while they wait for the company to find the right solution to lift this burden.

Like buying high-yield bonds with upside

In the near term, all four of these MLPs should supply investors with a lucrative income stream supported by stable cash flow and improving leverage and coverage ratios. Meanwhile, over the longer term, each company should be able to grow its payouts. While investors might need to wait a while before that growth materializes, the income plus upside is what makes these MLPs attractive choices for income seekers to consider.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.