This 10.9% Yield Is Safer Than It May Seem

This 10.9% Yield Is Safer Than It May Seem

Gathering and processing company Summit Midstream Partners (NYSE: SMLP) currently yields an eye-popping 10.9%. Typically, when a payout grows into the double digits, it's because the market believes it's unsustainable and has a higher probability of getting reduced. However, Summit's financial metrics suggest otherwise, which means yield-hungry investors can collect a very appetizing payout.

Summit Midstream Partners is on pace to pay $2.30 per unit out to its investors this year. Given the company's current financial guidance, it expects to generate $2.53 to $2.76 per unit in distributable cash flow, which implies a coverage ratio between 1.1 and 1.2. In fact, it has averaged 1.15 so far this year. That's a healthy coverage ratio for an MLP. For example, midstream behemoth Enterprise Products Partners (NYSE: EPD) expects its coverage ratio to be 1.2 this year, while natural gas pipeline giant Williams Partners (NYSE: WPZ) is planning on 1.17. Providing further support for Summit's guidance and the payout is that fee-based contracts underpin 95% of its expected earnings.

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Source: Fool.com