MLPs are required to pay profits to their limited partners. Dividend stocks can choose to stop paying dividends. Corporate bonds payments are fixed interest (a set number) but MLP payments are usually a percent of profits (a variable number). Would MLPs be between corporate bonds and dividend stocks on the risk/yield spectrum? Safer than dividends, riskier than corporate bonds. Higher yield than bonds, less yield than dividends.
1 Answer
On the contrary, MLPs have actually performed worse then dividend stocks in recent years. Yes their payouts (as a percentage of cash flows) are guaranteed, but remember that the value of stocks/units includes not only the dividend payout but also the value of the underlying company. A dividend payout is essentially cashing out a portion of the company and giving it to the shareholders, which means that the company CANNOT use it to grow, or worse, to weather bad financial times.
Non-MLPs can suspend dividends if necessary to retain cash to stay alive, while MLPs typically cannot. If an MLP hits a rough patch, they need to raise money somehow (usually by borrowing money), which may make them worse off financially than if they were able to suspend the dividend.
As an example, as oil/gas production dried up in 2014 the revenues of many pipeline MLPs plummeted (since they were's transporting nearly as much product).
answered Nov 2, 2018 at 18:47
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are MLP payments always or usually a % of profits instead of a fixed absolute value? because if the payments are fixed wouldn't it not matter if the company does poorly? except for the cases of if the company goes bankrupt or you want to sell your LP units for a high price. but i'm assuming that you buy MLPs mostly for the payments and not for hoping to sell it at a higher price in the future.– roobeeCommented Nov 2, 2018 at 19:39
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They're typically a percentage of cash flow (not necessarily income), but even so, my point is that the MLP can't suspend dividends, which is a viable option for a non-MLP. Commented Nov 2, 2018 at 19:43
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makes sense. another question. from wiki, the US requires that MLPs "must earn at least 90% of its gross income from qualifying sources, which were strictly defined as the transportation, processing, storage, and production of natural resources and minerals." i've read online that this effectively constrains MLPs to industries with very stable incomes/cash flows which i assume means they don't need much capital for growth. wouldn't that make being unable to stop payments less important?– roobeeCommented Nov 2, 2018 at 19:47
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That's the hope, but as oil/gas production dried up in 2014 the revenues of many pipeline MLPs plummeted (since they were's transporting nearly as much product). And they still need cash to grow so they can service more areas. Commented Nov 2, 2018 at 19:55
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cool. this seems to be a satisfactory answer. i read that you shouldn't pick an accepted question on stackexchange too quickly so I guess i'll wait a little first? also a suggestion now that the answer is complete is putting the explanations from the discussion into your main answer so people don't have to read the discussion.– roobeeCommented Nov 2, 2018 at 20:05