Tom's Life Bits

The MLP market can be divided into 2 classes. One class offers high dividends, say 10%, but limited growth.The second class offers lower dividends,say 5%, but with faster growth.

Some examples of the first class (I am using distribution records over the pst two years):

 FGP - Ferrelgas (steady unchanging 10% div.)
 VNR - Vanguard (9% growing at 4%/year)
 QRE - QR Energy (10.6% with no growth)
 LINE - Linn Energy (7.5% growing at 4.4%)
 LGCY - Legacy (9% growing at 2.4%)

Some examples of the second class:

OKS - OneOK Partners (4.8% growing at 16%)
PAA - Plains All American (4.3% growing at 9%)
EPB - El Paso Partners (5.9% growing at 17%)
GEL - Genesis (4.8% growing at 10%)
NGLS - Targa (6.8% growing at 12%)
XTEX - Crosstex (8% growing at 20%)

Widening our scope, we can look at the General Partners of MLPs:

KMI - Kinder Morgan (EPB & KMP): 4% growing at 15%
OKE - OneOK GP: 3% growing at 23%
TRGP- Targa (GP for NGLS): 3% growing at 36%
ENB - Enbridge (2.9% growing at 15%)

The basic reason for this divide is that investors will pay more for the higher growth rates.This raises the share price and thus lowers the dividend yield.

How should one evaluate the two classes? I suggest adding the curent yield to the growth rate to derive an adjusted yield. E.g., assume stock XYZ is valued at 100 and pays a $5 div. per year. Let's assume a constant growth rate of 20% per year. So after 1 year, it pays a $6 dividend. Other things being equal, the market would still be willing to pay $120 for the stock's 5% dividend. This can be verified in several cases: the rise in share price mtches the rise in dividends while the yield remains the same.

But beware that growth rates are choppy and that, worst case, without prospects of continued growth, XYZ might see its “expected growth rate” decline from 20% per year to 0%. This would require the yield to jump to 10% to maintain market interest, i.e., a drop from 100 to 60 as the dividend increases while the yield doubles.

In case I've convinced anyone, here's a list with “adjusted yield” > 20:

TRGP, NTI, TLLP, XTXI, XTEX, OKE, EPB, CMP, OKS, SXL