Magellan Midstream Partners, L.P.'s Incredible Dividend History

With a distribution yield of around 5.6%, Magellan Midstream Partners, L.P. (NYSE: MMP) doesn't have the highest yield in the midstream oil and natural gas space. But if you are looking for income, don't let the somewhat modest relative yield fool you. This partnership has an incredible distribution history. Here's what you need to know to understand just how great of an income machine Magellan really is.

More than yield

Enterprise Products Partners (NYSE: EPD) is generally considered one of the best-run midstream energy partnerships. With a $55 billion market cap, it is certainly one of the biggest (Magellan's market cap is a more modest $15 billion). And it yields roughly 6.6%, a full percentage point higher than what Magellan offers. For most investors, Enterprise is a good option in the midstream space.

In addition to that higher yield, Enterprise has increased its distribution every single year for 21 consecutive years. Magellan's annual streak is only up to 18 consecutive years. But that isn't the best way to look at this comparison, because each of these midstream partnerships has a history of increasing distributions every quarter. Enterprise is up to 54 quarters at last count. Magellan's quarterly streak is up to 63 -- or every quarter since its IPO in 2001. Magellan can stand toe to toe with giant Enterprise on the distribution increase front.

It's about growing

There's more to the story here, though. For example, Enterprise's historical distribution growth rate over the past decade was around 6%. That's not bad, roughly doubling the historical rate of inflation growth. But Magellan's rate of growth over the same span was around 11%. The chart below shows just how important that difference really is: Enterprise's distribution is roughly 70% higher than it was a decade ago, but Magellan's distribution is 175% higher. That helps explain why investors are willing to pay a premium for Magellan's units.

The future looks like it will be brighter at Magellan, too. That's because Enterprise has decided to reduce the pace of its distribution growth for a year or so in order to self-fund more of its own expansion plans. Basically, it wants to reduce the number of units it issues to pay for acquisitions and internal growth projects. The last quarterly increase was notably below the historical rate at less than 4%.

Magellan is expecting 8% distribution growth, driven by $1.15 billion in capital spending plans largely backed by customer commitments or evidence of adequate demand. There's another $500 million in the wings, as well. The projects in the works span the business, including pipelines, storage, and terminal expansions.

And while Enterprise's efforts to reduce dilutive unit issuances is a good move for unitholders, this is something that Magellan has been doing for a long time. In fact, over the last five years, Magellan has effectively issued no new units, self funding growth projects similar to the ones it's working on now. Enterprise's unit count was up 18% over that same span. Magellan is also more fiscally conservative than Enterprise, with a debt to EBITDA ratio of 3.4 times compared to Enterprise's 4.7 times. And Magellan is targeting robust distribution coverage of 1.2 times, meaning the distribution is very secure.

Many look to Enterprise as the bellwether of the midstream space, but in some ways, Magellan is a better income option despite the lower current yield. Magellan has a successful history of building and acquiring assets, a robust pipeline of projects with customers already lined up, and a history of higher distribution growth. More growth should lead to more distribution increases, extending the virtuous cycle built on a more financially conservative foundation.

Dig a little deeper

If you are looking for income in the midstream space, you need to look at Magellan Midstream Partners. It's not the bellwether for the industry like Enterprise is, but it is certainly a solid income option as well. Magellan's incredible distribution history shows why that's the case. For some, a higher yield will trump distribution growth, but when you take the full picture into consideration, Magellan really is one of the best options in the midstream space if you're looking for a mix of yield and distribution growth.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners and Magellan Midstream Partners. The Motley Fool has a disclosure policy.