Earlier this month, one high-yield MLP called
Boardwalk Pipeline Partners (
slashed its dividend by 81%.
Overnight, the stock price plunged from $24 to $13.
That's a one-day loss of 46%.
You may not own shares of
Boardwalk Pipeline Partners
. But the blowup of this
Master Limited Partnership
) provides valuable lessons for every income investor. I hope
this example can help you protect your capital while achieving
your income-investment goals.
Many income investors had been attracted to Boardwalk Pipeline
Partners due to the juicy yield. Before the dividend cut,
Boardwalk offered investors an attractive 8.5% dividend
In its Feb. 10 press release, the company explained, "The
reduction in the distribution will free up internally generated
cash to help fund growth and reduce leverage in order to
strengthen the balance sheet during the difficult market
conditions impacting the Partnership."
Boardwalk had a terrible quarter. The company's revenues
fell by 4% and cash earnings plummeted by 34%. At the same time,
the company's dividend obligations increased considerably because
the share count increased by 17% during the quarter.
This Happens When A MLP Cuts Its Dividend by
Source: Yahoo! Finance
But the real problem for Boardwalk is that its assets are
located along the Gulf Coast, where drilling activity and
production has been falling due to weak
. And that's hurting the company's sales and profit margins.
Back in October 2013, I warned
Income & Prosperity
readers about Boardwalk Partners. Over the past couple of years
the heavily indebted company's cash flow was barely enough to
cover its dividend obligations.
I was specifically concerned about the growth prospects for
The Wealth Building Energy Secret
, I wrote, "
The company's revenues and net income are relatively flat
over the last three years. Since the business isn't really
growing, Boardwalk hasn't raised its distributions much…payments
to shareholders have increase a total of 10% over the last five
Last quarter, Boardwalk had enough cash flow to cover its
existing dividend. But the company's execs clearly see that the
business is in decline, and want to reduce their obligations to
The challenges at Boardwalk are simple to understand. For
years, the company chose to offer shareholders a healthy 7% - 8%
dividend yield. But because nearly all the cash flow was going to
investors, there was little investment in growing the
business. As a result, even a small 3% drop in revenues was
enough to spark a huge dividend cut.
I recommended shares of two MLPs
MarkWest Energy Partners (
Plains All American Pipeline (
Both of these MLPs are growing their businesses and cash flow.
And within the last month, each company again raised its dividend
But the most important metric for every income investor is
distribution coverage ratio
. This is an easy way to measure a company's dividend obligations
compared with cash flow available for dividend payments (known as
distributable cash flow
For MarkWest Energy Partners and Plains All American Pipeline,
this ratio is expected to be 1.2 in 2014. That means that both
companies have distributable cash flow that is 20% more than
their current dividend obligations. Even if they have a
temporary hiccup, they should be able to pay their
Both of these MLPs pay a current yield of 4.6%. That may not
be enough to get your heart racing. But these safe dividends are
far superior to the 3.1% yield from Boardwalk Pipeline.
With healthy growth prospects and sufficient cash flows,
MarkWest and Plains All American should continue to reward
Income From Pipelines: the Safest Energy
Most investors hope to "catch a flier" on small, risky
exploration companies who usually don't have a drop of oil in
their wells. But in our experience, people don't build pipelines
until they know when and how much oil they'll pump. Which makes
pipeline stocks the least risky investments in the entire energy
sector. No pipes - no oil.
Click here to read my full write-up on two
American pipeline stocks paying big (and growing) dividends