The energy sector is experiencing a bit of a Renaissance. Demand for electricity is expected will rise sharply in the coming years, fueled by a multiple of catalysts, including the electrification of the transportation sector and AI data centers. This expected increase in energy demand should benefit companies that produce, transport and distribute natural gas.
The smartest The way to ride this coming wave is to invest in master limited partnerships (MLPs) with meaningful gas infrastructure operations. Because MLPs are currently trading at lower valuations than pipeline companiesthey offer higher yields and total return potential.
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The market has been bidding for gas pipeline companies this year, fueled by the expected increase in gas demand in the coming years. Stocks of leading pipeline companies Kinder Morgan, One okAnd Williams have increased by 60% or more in the past year. Although the MLPs have also rallied, they are have not risen just as sharp as their peers. Partners for business products (NYSE:EPD), Energy transfer (NYSE:ET)And MPLX (NYSE: MPLX) have risen between 30% and 40% over the past year and are trading at relatively lower valuations:
These lower valuations are an important reason MLPs offer much higher income returns 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 is comparable to the dividend yields of their peers, which are between 3% and 4%. A $1,000 investment in one of these MLPs would generate more than $60 in income each year, nearly double the $30 to $40 in dividend income an investor would receive from a similar investment in a pipeline company.
There is one warning: MLPs send their investors a Schedule K-1 federal tax form every year, while pipeline companies a Form 1099-DIV. Schedule K-1s can complicate an investor’s tax filing, that’s why many avoid these entities. However, MLPs do attractive tax benefitsmaking their after-tax income even higher than that of pipeline companies.
A higher income stream is only part of the appeal of these MLPs. She also have strong growth prospects comparable to their peers.
Enterprise Products Partners, for example, currently has $6.9 billion worth of major projects under construction. These projects include several natural gas processing plants and gathering system expansions. It also has projects to support continued growth in demand for natural gas liquids and refined products. These projects should be operational through 2026 and support future cash flow growth and capital returns for investors. The MLP has increased its distribution for 26 years in a row seems very will probably continue.
MLPX has several gas-related infrastructure projects in progress. The company and its partners approved the construction of the Blackcomb and Rio Bravo pipelinesthat will transport Permian gas to domestic and export markets when it enters commercial service in the second half of 2026. There are also several additional gas processing plants under construction that will be operational in the second half of 2026. These projects will give the MLP more fuel to grow its high-yield distribution. MPLX recently gave investors a 12.5% raise and has increased its payout by double digits each of the past three years.
Energy Transfer believes it is one of the better positioned midstream companies to benefit from the boom in AI power. The company sees great interest in additional gas capacity throughout its footprint. This should support higher utilization of existing gas pipeline systems and opportunities to expand capacity. Gas pipelines are only part of Energy Transfer’s growth story. The MLP has several other expansion projects under construction or in development, including export terminals, gas-fired power plants and some low-carbon energy options. These projects support the company’s vision of growing its high-yield distribution by 3% to 5% per year.
MLPs have underperformed their corporate peers this year and are now trading at lower valuations and higher dividend yields, despite equally robust growth prospects. As a result, they appear to be buying the smartest stocks in the energy sector at the moment.
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Matt DiLallo has positions in Energy Transfer, Enterprise Products Partners and Kinder Morgan. The Motley Fool holds and recommends positions in Kinder Morgan. The Motley Fool recommends Enterprise Products Partners and Oneok. The Motley Fool has a disclosure policy.
The Smartest Energy Stocks to Buy Now with $1,000 was originally published by The Motley Fool
