Master Limited Partnerships, or MLPs, are well-known for their high distribution yields, which makes them popular among income investors.
The vast majority of MLPs belong to the energy sector, with most operating in oil and gas exploration & production (upstream) or transportation & storage (midstream).
However, there are some investors who may not want to have exposure to the high-cyclicality energy sector but want the high-income potential from MLPs.
For these investors, we will analyze the prospects of these high-yield MLPs that do not belong to the energy sector. There are a few MLPs that do not belong to the energy sector and are not directly involved in oil and gas.
So here are three non-energy MLPs offering a combination of yield, safety and resilience to downturns.
- Icahn Enterprises L.P. (NASDAQ:IEP)
- Landmark Infrastructure Partners (NASDAQ:LMRK)
- Compass Diversified (NYSE:CODI)
Non-Energy MLPs: Icahn Enterprises L.P. (IEP)
Icahn Enterprises L.P. is a diversified holding company with operating segments in Investment, Energy, Automotive, Food Packaging, Metals, Real Estate, Home Fashion and Pharma.
Carl Icahn owns approximately 91% of the outstanding units of the MLP.
Thanks to his exceptional investing skills, Carl Icahn invests in companies that enjoy key competitive strengths. Icahn Enterprises also aims to invest in companies that have ample room to grow organically or can grow through acquisitions thanks to the high fragmentation of their markets.
The MLP also aims to achieve a great number of synergies whenever it performs acquisitions.
Icahn Enterprises is also well-known for acquiring major stakes in undervalued companies and then taking control of these companies. This strategy is known as the “activist strategy.”
The MLP initiates drastic changes in the business models of its companies but does not get involved in day-to-day operations. Icahn Enterprises has significant stakes in Occidental Petroleum (NYSE:OXY), Xerox (NYSE:XRX), Newell Brands (NASDAQ:NWL), Hertz (OTCMKTS:HTZGQ) and others.
Icahn Enterprises has a markedly volatile performance record, as its results depend on the performance of these companies and the status of the stock market. For instance, the valuation of these companies plunges during market sell-offs, such as the fierce bear market caused by the pandemic last year.
On a positive note, Icahn Enterprises is currently paying an annual distribution of $8.00 per unit, which results in a very high distribution yield of 13.8%. As the MLP has failed to make a profit in the last 12 months, it is only natural to worry that the distribution is not sustainable.
However, it is critical to realize that this distribution is paid in cash only to 9% of the units of the MLP. Carl Icahn, who owns 91% of the units prefers to receive his distributions in units instead of cash. As a result, the high distribution is easily affordable.
On the other hand, due to this strategy, the MLP dilutes the minor unitholders at a fast pace. This is an important point of concern for investors with a long-term horizon.
Landmark Infrastructure Partners (LMRK)
Landmark Infrastructure Partners provides real estate on a lease basis to wireless carriers for their cell towers, to advertising operators for their outdoor displays, to power companies for their renewable energy units and to data storage companies for their data centers.
The MLP uses triple net leases with contractual rent escalation. It thus achieves organic growth without incurring any capital expenses. It owns properties in difficult-to-replicate locations in major population centers and leases them to Tier 1 tenants, such as AT&T (NYSE:T) and Verizon Communications (NYSE:VZ), which easily meet their rent obligations even under the most severe economic conditions.
Landmark Infrastructure Partners has posted essentially flat funds from operations per unit throughout its 6-year history. However, it has decent growth prospects ahead, primarily thanks to the nationwide rollout of 5G, which will require densification of the existing cell tower networks.
It is also worth noting that its advertising segment was severely hurt by the pandemic last year, as the demand for outdoor advertising collapsed. However, the pandemic is likely to subside in the second half of this year. As a result, advertising activity should recover strongly.
Early signs of a recovery have already shown up in this segment of the MLP. Advertising activity bottomed at the end of the second quarter of 2020 and has been gradually recovering since then. As the pandemic subsides, we expect the recovery of the advertising segment to gain even greater momentum later this year.
Landmark Infrastructure Partners serves industries such as telecommunications and power, which are fairly resilient to recessions. As a result, the MLP is somewhat resilient to recessions. In 2020, which was marked by the fierce recession caused by the pandemic, the MLP grew its funds from operations per unit 5% but it slashed its distribution by 46% in order to preserve cash and endure the crisis.
Nevertheless, Landmark Infrastructure Partners still offers an above-average 6.1% distribution yield. As it has a healthy payout ratio of 56% and it is in recovery mode, its distribution should be considered safe. Management has stated that it will raise the distribution as soon as the pandemic subsides.
High-Yield MLPs: Compass Diversified (CODI)
Compass Diversified is a private equity firm that specializes in acquisitions in the middle market, which includes businesses with owner earnings between $10 million and $500 million.
Compass Diversified purchases significant stakes in small companies and holds them with a long-term perspective. It was founded in 1998, it went public in 2006 and has grown its annual revenues to $1.7 billion.
Compass Diversified has a long-term investing approach. This differentiates it from most private equity firms, which are under pressure to yield strong results quarter after quarter. This is a significant competitive advantage, which helps explain the exceptional long-term performance of the stock.
Since its IPO, Compass Diversified has generated a total return of 529%, which is much greater than the 312% total return of the S&P 500 and the 293% total return of the Russell 2000. This outperformance is certainly outstanding and helps explain why the management of Compass Diversified has a significant and growing portion of the shares of the MLP.
Overall, management seems committed to maintaining the current dividend, which corresponds to a 5.6% dividend yield, though the dividend may come under pressure during a severe downturn.
Compass Diversified boasts of having nearly $600 million in cash as “dry powder” for opportunistic acquisitions during bear markets, such as the one caused by the pandemic last year.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.