Finding a Few Good MLP / Midstream Income Stocks
I just posted a video demonstrating how to use the “I Prefer Income” program to search for, identify and analyze income stocks within one of the most downtrodden industries in the marketplace – energy. Specially, I was looking to find a few midstream stocks that I consider to be reasonably safe that provides a reliable and sustainable dividend. The oil and gas industry can be divided into three major components: upstream, midstream and downstream.
- Upstream companies identify and extract raw materials from underground resources.
- Midstream companies gather, transport, process and store petroleum products.
- Downstream companies refine and provide services closer to the end user.
The video is part of an educational video series to provide information on the “I Prefer Income” program and how to use the tools and metrics to zero in on stocks of interest. The IPI Motto is “Rely on Yourself Investing”. The goal is to increase each person’s investing knowledge and skills to where they will feel comfortable making their own investing decisions. Yes, it will take time and effort, but the result is that you will not have to rely on others for tips and recommendations to make the decisions for you. I love reading investment articles to bring awareness to a stock or an industry; but ultimately, I want to be able to uncover my own stocks; or to at least be able to confirm outside recommendations.
2 Types of Income Investors
I Prefer Income focuses on 2 types of income investors:
- DG (Dividend Growth). Dividend growth stocks focus first on dividend growth and their ability to continue growing the dividend in the future. Normally DG stocks have lower yields, but there are exceptions.DG stocks are companies with A) at least a 5-year history of increasing their dividends every year, B) have a yield approximately equal to or greater than the S&P 500 average yield, C) have a strong earnings growth that is approximately 3 times S&P 500 average yield, D) have a dividend growth rate equal to or above yield requirements, has a E) low payout ratio (industry average or better) and E) reasonable to low debt (industry average or better).
- Immediate Income. Immediate income stocks focus first on stocks that can provide a higher yield to satisfy investor income needs. To find high yield stocks, the investor must normally sacrifice other criteria, such as dividend and earnings growth, low payout ratios and debt ratios. However, that does not mean we must settle for weak or unstable companies to obtain higher yields. We just need to keep our eyes open and have access to a wide range of dividend stocks that can provide good opportunities. Here is a list of criteria we look for:Immediate Income stocks should have a A) yield > (3 x S&P 500 average yield), B) stable or dividend growth, C) reasonable earnings that ARE stable or growing, D) reasonably stable or improving payout < 1, and E) reasonable debt that is at or equal to or below industry averages.If the security is a preferred stock or ETD security, there are different criteria. Parent company A) should pay a common stock dividend, B) parent should have stable or growing dividend, C) parent should provide stable or growing earnings, D) parent should provide a payout that is < .90 and is stable and/or improving, E) should have a preferred stock dividend payout of < .5. F) If child issues provide investment grade ratings then the criteria could replace A through E criteria. G) Interest rates should be stable or trend to lower rates.
Video – Using the IPI program to search for, Identify and Analyze REIT stocks.
Getting back to the video. The video provides a lot of detailed information on how I use the program to search for, identify and analyze stocks within the MLP / Midstream industry. I am looking for Midstream companies that meet my requirements for Immediate Income stocks. I use the filter program to narrow my search using the criteria shown in image 1:
(Source: I Prefer Income Filter)
The filter program narrowed the search to 6 companies. I then used the Ranking program to compare and rank the 6 stocks from 1st to 6th using the criteria and weighting that I am able to select. The ranking results are shown below:
(Source: I Prefer Income Ranking Program)
Once the ranking program is run, it ranks and sorts the result from first to last. The criteria used is shown in the first 5 columns on the left. Scores are tabulated and a total score is arrived at. The Rank is then determined from the scores. Lowest score is best. Based on the criteria and weight I applied to each criteria, CNXM ranks as number 1 and MMP is 6. Here is the table of each stock along with many of the financial metrics.
(Source: I Prefer Income Stock Table)
The ranking program ranks and sorts the stocks based on my criteria and weight, but there is more analysis to be done. I personally strive to invest in stocks that can provide a yield over 6%. Each of these stocks meet that requirement and 3 go substantially higher. In addition to yield, it is important to review the 4 areas of analysis:
Dividends: 3-year dividend growth rates are all positive, but note the differences. CNXM is highest at 14.86%. There are 4 stocks that have increased their dividend every year for 5 or more years (dividend diamonds). That is an important sign of financial health.
Earnings: All companies have positive earnings and 3-year earnings growth. Note the range of growth. Once again CNXM is highest.
Payout: Payout ratios are all in good shape with EPD having the lowest at .59. Note that all CFFO Payout ratios are good, with CNXM being the best at .45.
Debt: There are a wide range of ratios. Debt is a very important metric. Generally, the lower the better; however, if too low, it could mean the company is not using debt enough to grow. Each industry is different, so it is a good idea to review industry averages. The average debt-to-equity for the midstream industry is 1. Most of the 6 stocks are close with ENBL being low and WES being high.
When I look at the 6 stocks selected from the filter program and then rank them from 1 to 6, I see stocks that could provide good investment choices for investors. CNXM and ENBL provide the best ranking scores of 1 and 2. They also provide high yields and very good financial metrics. However, they are not dividend diamonds that have a history of increasing dividends every year. Those 4 dividend diamonds provide a degree of safety that many conservative investors require. That safety comes at a price with 3 of the 4 having lower yields above 6%.
Every investor has to determine the investment path that they are most comfortable with. The table of 6 stocks provides a range of Immediate Income stocks. Regardless of which stocks you feel comfortable with, take the time to dig a little deeper. Click on the web link in the right column to visit the website to read 1 or more of the recent quarterly statements. There is a lot that can be learned, including comments from management and future guidance. In addition, look for articles located in the notes column or on the Articles link at the top of the page. Also search for industry and general economic news.
The above article provides some of the highlights from the video, but it is best to view the video in order to get a better understanding of how the program and tools work to filter and rank the stocks. Then there are the financial metrics used to analyze the stocks. I especially like to analyze stocks when they are in a group of their peers. It helps to see the differences.
I hope you find this article, the video and the I Prefer Income program to be of value. Remember that the “I Prefer Income” programs are free and available to anyone that is interested in “relying on yourself investing”.
To view the video, click on the > above. (Please note that if video is not clear, click on settings at bottom right corner and select HD1800)
To visit the “I Prefer Income” website, please click here.
Thanks. I will talk to you later,
I Prefer Income!