Understanding High-Yield MLPs And How to Choose the Best Ones for 2010 (EPD, KMP, TNH, NGLS, PAA, EVEP, ARLP)

Investors looking for yield plays have undoubtedly come across the acronym MLP, particularly when looking at opportunities in the energy sector. If you are confused about what an MLP is, here’s a primer on these attractive, high-yielding stocks.

MLP stands for master limited partnership, which is a business structure designed to pass through the bulk of its income to shareholders. The big benefit of the MLP setup is the tax advantage it provides to both the business and shareholders. As entities that distribute the majority of their cash flow to shareholders, MLPs don’t have to pay taxes at the company level, which greatly lowers their cost of capital.

In order to qualify to become an MLP, a company generally has to earn 90% of its income through activities involved with the production or transportation of natural resources and/or commodities. There are a few exceptions, as we’ve come across MLPs tied to real estate, amusement parks, and even one operating in the death care business. Firms best suited for the MLP structure are those that have steady, predictable cash flows, as cash flow is king in the MLP world.

Many of the opportunities in the MLP universe come in the form of pipeline and shipping companies that produce dependable cash flows. The key metric to look at is Distributable Cash Flow (DCF), which is the amount of cash available for distribution that an MLP generates. Net income isn’t terribly important for many MLPs, as they can show net losses due to large depreciation expenses and still produce substantial DCF.

In a new 65-page special report entitled 10 for ‘10: High-Yield Stock Picks for 2010, BullMarket.com gives its top-ten high-yield stocks for the new year, as well gives opinions on over 50 other high-yield stocks. Last year’s report, Nine High-Yield Stocks for 2009, featured two MLP picks: Enterprise Products Partners (EPD) and Kinder Morgan Energy Partners (KMP), which returned 83% and 37%, respectively. All in all year, last year’s picks had a one-year average return of 75.1%.

This year’s report features over 30 MLPs, including names such as Terra Nitrogen (TNH), Targa Resources Partners (NGLS), Plains All American (PAA), EV Energy (EVEP), and Alliance Resource Partners (ARLP), among many others.

For access to the 65-page report, examining each pick’s dividend history, business activities, strengths, weaknesses, latest earnings report, and much more, visit BullMarket.com. MLP investors would also be interested in BullMarket.com’s dedicated MLP hub and earlier MLP special report.

Tags: ARLP, EPD, EVEP, KMP, NGLS, PAA, TNH