The S&P 500 has climbed over 13% this year, pushing the index to trade at more than 20 times earnings, well above its historical average in the mid-teens over the past quarter-century. While the broader market trades at a premium, pockets of value remain for discerning investors.
Three energy master limited partnerships trade at rock-bottom valuations that have pushed their dividend yields to eye-popping levels between 7.8% and 9.6%. These companies are growing earnings at healthy clips, investing billions in expansion projects, and operating from their strongest financial positions in years. The bargain prices stem largely from their MLP structures rather than fundamental weakness.
Energy Transfer (ET)
Dividend Yield: 8.0%
Valuation: Less than 9 times earnings
Energy Transfer currently trades at less than 9 times earnings, the second-lowest level in its peer group where the average sits around 12 times. This depressed valuation has pushed the yield to an eye-popping 8%, despite the midstream giant delivering brisk growth with a 10% compound annual earnings growth rate since 2020.
The master limited partnership operates in its strongest financial position in history, yet the market continues undervaluing the business. This disconnect between operational performance and stock price creates the opportunity.
Growth Capital Deployment
Energy Transfer is spending $5 billion this year on growth capital projects, which should fuel accelerated earnings expansion. The company has projects in the backlog scheduled to enter commercial service through 2029, providing visibility into future cash flow growth.
These growth initiatives give Energy Transfer fuel to increase its already-high distribution, which management aims to grow 3% to 5% annually. The combination of 8% current yield plus 3-5% annual growth creates attractive total return potential.
Why the Discount Exists
The MLP structure requires sending investors a Schedule K-1 Federal Tax Form each year rather than the simpler 1099 form. This tax complexity deters some investors, particularly those with tax-advantaged accounts where K-1s create complications. The structural discount creates opportunity for investors comfortable with slightly more complex tax filing.
MPLX (MPLX)
Dividend Yield: 7.8%
Valuation: Below peer average
MPLX trades at a similarly low valuation that has pushed its distribution yield to 7.8%. Like Energy Transfer, MPLX is growing at a healthy rate with earnings and cash flow expanding at nearly a 7% compound annual rate since 2021.
The midstream operator benefits from its relationship with Marathon Petroleum, providing stable cash flows from fee-based contracts for transporting and storing petroleum products and natural gas liquids.
Capital Allocation Strategy
MPLX is deploying over $5 billion into growth initiatives this year, including organic expansion projects and accretive acquisitions. The company has growth capital projects lined up to come online through the end of the decade, providing substantial visibility into future cash flow generation.
This project pipeline gives MPLX confidence to grow its high-yielding payout steadily. The 7.8% starting yield combined with distribution growth creates compelling income potential for patient investors willing to hold through the tax complexity.
Operational Momentum
The nearly 7% compound annual growth rate since 2021 demonstrates MPLX’s ability to expand its business organically and through acquisitions. The company’s scale advantages in key markets and relationships with anchor shippers provide competitive moats that support sustained cash flow generation.
Plains All American Pipeline (PAA)
Dividend Yield: 9.6%
Valuation: Rock-bottom
Plains All American Pipeline offers the highest yield of the three at 9.6% due to its exceptionally low valuation. The oil pipeline company has grown earnings at a 7% compound annual rate since 2021 while strengthening its balance sheet to the best position in years.
The 9.6% yield reflects significant market skepticism, yet the operational performance suggests the pessimism may be overdone. Plains operates critical midstream infrastructure that generates stable fee-based cash flows from transporting crude oil and natural gas liquids.
Portfolio Optimization
Plains is actively optimizing its asset portfolio to enhance cash flow durability. The company is selling its Canadian natural gas liquids assets to shed exposure to commodity price volatility. These assets, while profitable, introduced earnings variability that the market penalized.
Plains is recycling that capital into new investments producing more resilient cash flows. This strategy shift toward fee-based infrastructure with less commodity exposure should improve the quality and predictability of earnings, potentially supporting valuation expansion.
Strategic Positioning
The portfolio optimization demonstrates management’s focus on cash flow quality over pure growth. By shedding volatile assets and reinvesting in stable infrastructure, Plains positions itself to sustain and grow its exceptionally high distribution from a more durable earnings base.
This transformation takes time to reflect in valuations, creating opportunity for investors who recognize the improving business quality before the market fully appreciates the changes.
Understanding the MLP Discount
All three companies operate as master limited partnerships, a structure that creates both the high yields and the valuation discounts. MLPs avoid corporate income tax by distributing most earnings to unitholders, who then pay tax on their individual returns.
This tax-efficient structure enables the high distribution yields, but comes with complexity. MLPs issue Schedule K-1 forms rather than 1099s, requiring more detailed tax preparation. K-1s can create issues in IRAs and 401(k)s if distributions exceed certain thresholds, making MLPs less suitable for tax-advantaged accounts.
The structural complexity deters institutional investors and retail investors unwilling to handle K-1 forms. This creates a persistent valuation discount for MLPs compared to corporations with identical operations, presenting opportunity for investors comfortable with the tax paperwork.
Growth Visibility
All three companies have substantial growth capital projects scheduled through the end of the decade. Energy Transfer and MPLX are each deploying over $5 billion annually, while Plains’ optimization strategy requires significant capital recycling. These investments should support continued earnings growth and distribution increases.
The combination of high current yields (7.8% to 9.6%), projected distribution growth (3-7% annually), and low valuations creates potential total returns that significantly exceed broader market expectations. For income-focused investors willing to manage K-1 complexity, these energy MLPs offer compelling value in an otherwise expensive market.
