The energy industry is experiencing a bit of a renaissance. Electricity demand is expected to surge in the coming years, fueled by a multitude of catalysts, including the electrification of the transportation sector and AI data centers. This anticipated uptick in power demand should benefit companies that produce, transport, and distribute natural gas.
The smartest way to play this coming surge is investing in master limited partnerships (MLPs) with meaningful gas infrastructure operations. Since MLPs currently trade at lower valuations than pipeline corporations, they offer higher yields and total return potential.
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The market has been bidding up gas pipeline companies this year, fueled by the expected surge in gas demand in the coming years. Shares of leading pipeline corporations Kinder Morgan, Oneok, and Williams have rocketed 60% or more over the past year. While MLPs have also rallied, they haven’t risen quite as sharply as their corporate peers. Enterprise Products Partners (NYSE: EPD), Energy Transfer (NYSE: ET), and MPLX (NYSE: MPLX) have risen between 30% and 40% over the past year and trade at relatively lower valuations:
Those lower valuations are a big reason MLPs offer much higher income yields these days. Enterprise Products Partners’ distribution yields more than 6%, while Energy Transfer’s is 6.5%, and MLPX’s payout is 7.5%. That compares with their corporate peers’ dividend yields in the 3% to 4% range. A $1,000 investment into one of these MLPs would produce more than $60 of income each year, nearly double the $30 to $40 of dividend income an investor would collect from a similar investment in a pipeline corporation.
There is one caveat: MLPs send their investors a Schedule K-1 Federal Tax Form each year, while pipeline corporations send a Form 1099-DIV. Schedule K-1s can complicate an investor’s tax filing, which is why many avoid these entities. However, MLPs have attractive tax advantages, which make their after-tax income yields even higher than those of pipeline corporations.
A higher income stream is only part of the draw of these MLPs. They also have strong growth prospects similar to those of their corporate peers.
For example, Enterprise Products Partners currently has $6.9 billion of major projects under construction. These projects include several natural gas processing plants and gathering system expansions. It also has projects to support the continued demand growth for natural gas liquids and refined products. These projects should enter service through 2026, supporting future cash flow growth and capital returns to investors. The MLP has increased its distribution for 26 straight years, which seems highly likely to continue.
