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2 Scorching Hot High-Yield Dividend Stocks — Are They Buys?

Coal miner Alliance Resource Partners, L.P. (NASDAQ: ARLP) offers an impressive 10.6% distribution yield. Midstream energy player Buckeye Partners, L.P. (NYSE: BPL) provides unitholders with a hot 8.4% yield. Those are fat yields, but are these two partnerships buys at current prices? Here's what you need to know.

An improving business

There's no question that thermal coal miners are under intense pressure today from low prices. In fact, Alliance noted this fact in its second quarter earnings release, explaining that, "...coal sales revenues declined due to the anticipated reduction in coal sales prices." However, coal volumes were up, and the company was able to cut costs, leading to flat year over year net income of $0.82 per unit. The partnership remains on track to meet management's full-year guidance.

Image source: Getty Images

The rest of the news from the quarter was pretty good. For example, Alliance boosted its distribution by 14%. It believes that it will cover its 2017 distribution by nearly 1.8 times, a huge level of coverage in the partnership space. It also exchanged units for the incentive rights owned by Alliance Holdings GP, L.P. (NASDAQ: AHGP), the partnership's general partner. That's the first step toward Alliance Resource Partners buying Alliance Holdings, a move that will materially simplify the company's structure.

In addition, Alliance Resource Partners put some cash into the midstream space, buying a $100 million preferred Interests in Kodiak Gas Services, a privately held gas compression company. That could help the coal partnership diversify its business so that it isn't completely dependant on coal. It's an interesting long-term move, but it deserves close scrutiny. Propane-focused Ferrellgas Partners tried a similar thing on a larger scale and it didn't go well. I think it's the right move, but don't just accept that it will work out.

BPL data by YCharts

Taken as a whole, however, nothing appears off track at Alliance, and it expects to have ample distribution coverage. That makes the 10% plus yield an interesting option for income investors willing to bet that coal isn't dead just yet.

Tough numbers

Second quarter results were less inspiring at Buckeye Partners. Net income per share of $0.80 was down from $1.07 in the second quarter of 2016. While the company increased its distribution by $0.0125 cents compared to the first quarter of 2017, distribution coverage fell to 0.95. And it is still working to find new customers to offset the loss of a notable customer at one of its facilities. Taken together these aren't reassuring pieces of information.

However, this isn't the first time that Buckeye's distribution coverage has fallen below one -- it didn't cover the distribution in 2013 or 2014 either, only pushing back above one the following two years. This is just a single quarter, and the partnership, which has increased its distribution annually for more than two decades, is comfortable falling slightly below one over the short term as it looks to the longer term.

The most notable long-term investment recently was the purchase of a 50% stake in global storage company VITTI. (This move helped push Buckeye's unit count higher by around 10 million units year over year.) The investment, however, materially diversified the company's business and is a net positive. It's only contributed to results for one quarter at this point.

And while the loss of a customer isn't positive, there's no reason to believe that Buckeye won't be able to find replacement customers. In addition, the partnership is investing in pipeline projects like one that will link up the prolific Permian Basin to its assets in south Texas. All in all, there's reason to believe that the current distribution coverage shortfall will be temporary.

An overview of Buckeye's Texas pipeline investment. IMAGE: Buckeye Partners, L.P.

Which is why investors should like the partnership's over-8% yield. This isn't a risk free investment (the current quarter proves that), and there are a lot of moving parts, but for more aggressive types this could be a good opportunity to catch a fat yield.

Act now

Investors are pushing shares of Alliance and Buckeye down right now and appear to be missing the strong prospects underlying each partnership. Investing in either would require a strong stomach, to be sure, but these hot yields could be a temporary opportunity. That's particularly true if Alliance continues to put up solid results, as it currently expects it will, and Buckeye's investments for the future bring distribution coverage back above one, as its past investments have done before.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners. The Motley Fool has a disclosure policy.