In today’s fear-driven market it’s chic to be negative, and most optimists are considered naïve at best. That’s just the way we like it in the master limited partnership (MLP) universe, particularly after the outsized gains we’ve seen the past two years.

True, the days of 10 percent-plus–and even most 9 percent plus annualized yields–are behind us, except for highly risky fare barreling toward distribution cuts. But it’s still possible to buy high-quality MLPs yielding between 5 to 9 percent, and these companies are poised to grow those dividends anywhere from 5 to 10 percent.

MLP unit prices fluctuate for a wide range of reasons, most of which mean nothing to long-term value. That includes selloffs due to equity offerings, which invariably are used to finance acquisitions and asset-building that will add to cash flows and thereafter to distributions. The Enterprise Products Partners LP (NYSE: EPD) incident we highlighted in a Mar. 22 Alert is a classic example of how literally nothing can set off selling and trigger sharp slides, which are almost always reversed within hours or days.

Over the long term MLPs’ unit prices follow distributions higher. As a result, dividend growth for our favorites adds up to annual returns of 10 to 19 percent. That’s superior to almost anything else I can think of, particularly anything that’s tax-advantaged, as MLPs are.

Another point we made in the Mar. 22 Alert is that you can do even better by setting buy limit orders at “dream” prices. As a rule of thumb, buying 20 percent cheaper means a dividend yield that’s a full quarter higher. An 8 percent yield, for example, becomes 10 percent for the lucky buyer on such an off day.

The key to taking advantage of such unexpected bargains is to be positioned for them ahead of time. Buying Enterprise Products in the low 30s on Mar. 15, for example, would have been tough for anyone without a buy limit order already in place.

Of course, setting these buy limits is much more art than science. Enterprise’s decline to less than $28 per unit on Mar. 15, for example, was caused by inherently irrational factors. There was no company news. Rather, selling for no particular reason almost surely triggered a wave of “sell” orders, mandated, most likely, by pre-set stop-losses or ill-conceived options positions that required selling the underlying common stock. And there were no bids to match those “sells,” so the bottom literally fell out.

We’re not the only investors who’ve noticed MLPs seem to be particular vulnerable to this kind of volatility, as a recent article at SeekingAlpha.com points out. Rather than refer to buy limit orders as “stink bids,” as the author did, I prefer to call the strategy setting “dream prices.”

Most of the time, such dreams are never realized and buy prices go unexercised. But on those occasions when they do, you can lock in breathtaking gains. As I pointed out in the Mar. 22 Alert, for example, those who bought near the bottom for Enterprise on Mar. 15 are up more than 50 percent already.

The buy targets we’ve set in MLP Profits in the Portfolio tables represent good buy-in prices based on surety of revenue, dividend yields and dividend growth. If you buy now, we’re confident you’ll realize robust total returns–in addition to generous near-term income.

On the other hand, if you successfully buy in at a dream price your returns will be that much higher. And as we continue to see on almost a daily basis, investors in this market are easily spooked out of positions in great companies where their actual risks are slight.

Setting a buy limit price 20 to 30 percent below the current price of an MLP you want to own may seem like a pipedream. But as we saw with Enterprise, Genesis Energy LP (NYSE: GEL) and other recommendations recently, all it takes is one bad day to get you what you want.

Of course, there’s always the possibility that a selloff in a particular MLP is justified. Businesses don’t always succeed in meeting their objectives or guidance on the numbers. And if one of our MLPs does truly weaken from a business perspective, we’re going to get out. That will be true no matter what the return is to date or how long we’ve held it.

To be sure, that’s unlikely with the North American economy and energy business apparently picking up steam. In fact, as we pointed out in a Mar. 28 Alert, even the MLP that’s arguably our riskiest pick–Encore Energy Partners LP (NSYE: ENP)–is dropping risk by merging with much stronger Vanguard Natural Resources LLC (NYSE: VNR).

Hold Encore through the merger and receive the 0.72 units of Vanguard. At that point we’ll add Vanguard Portfolio. We currently rate Vanguard Natural Resources a buy up to 30 and Encore Energy Partners a buy to 24 for those who don’t already own it.

Should one of our holdings start to weaken, we’ll find out about it in the numbers long before the situation becomes critical. That makes it wholly unnecessary and in fact highly dangerous to use stop-losses. Rather, take advantage of others’ folly by using buy limit orders at dream prices.

The table below shows how our picks stack up according to our MLP Profits Safety Rating System, the criteria for which are as follows.

Percentage Fee-Based Income. MLPs that rely on fees for service or for use of their assets have much steadier cash flows than MLPs that rely more on economic activity and commodity prices. We award one point to any MLP that draws cash flows primarily from a fee-based business, such as operating pipelines and energy storage systems.

Note we don’t include tanker revenue locked in by long-term contracts or oil and gas producer revenue locked in by price-hedging as equivalent to true fee income.

That likely understates dividend safety at companies like Navios Maritime Partners LP (NYSE: NMM), which has locked in its tanker revenue with a series of long-term contracts that eliminate exposure to near-term swings in tanker rates. It also understates the security of Linn Energy LLC (NYSE: LINE), which has locked in selling prices for all of its natural gas output for the next five years.

Most companies in these businesses don’t hold these advantages. And, as such, hedging is at the discretion of management and is constrained by market conditions. It is a point of demarcation between true fee-based businesses and companies that have simply hedged out exposure.

Neither do we include activities such as gas gathering, where activity depends heavily on commodity prices, or any processing, where margins depend on commodity price spreads. Profits in these areas are inherently variable.

Dividend Coverage. Lower payout ratios are always better. Investors should take care to ignore any analysis of MLP profits and dividend safety that mentions earnings per share, as MLPs minimize these by law. The only appropriate metric is distributable cash flow (DCF), which factors in MLP tax advantages.

DCF is calculated by adding back tax-avoidance items to earnings per share, which are mainly accounting expenses that involve no outlay of cash, such as depreciation. Maintenance capital expenditures, which are needed to run the business and maintain equipment, are also taken out.

A coverage ratio of 1.25-to-1 is equivalent to a payout ratio of 80 percent and generally indicates a well-covered and therefore safe distribution with upside potential. The more fee-based income an MLP has, the higher a payout ratio it can sustain. Conversely, the more commodity price-sensitive an MLP is, the lower a payout ratio (higher coverage ratio) it should have to be considered safe.

MLPs that meet this criterion also receive one point under the Safety Rating System.

Debt. Our MLP recommendations have been able to use generation-low interest rates to slash interest costs, eliminate refinancing risk by extending debt maturities economically and fund asset acquisitions and construction. As a result, balance sheets are stronger than ever.

Nonetheless, less debt is safer, so we award each a point under our Safety Ratings System if it has an investment-grade rating, less than 60 percent of total capital as debt, or little or no refinancing risk (no debt due before the end of 2012). Data for ratings and refinancing risk are shown in the table. For debt-to-capital ratios, see How They Rate.

Dividend Growth. Nothing highlights a strong MLP like consistent dividend growth. We award any company a point for growing its distribution over the last 12 months.

The number of these criteria met by an individual MLP determines its MLP Profits Safety Rating. Not every high-rated MLP is a “buy,” and not every low-rated MLP is a “sell.” The key is how these Safety Ratings match up to valuations and what kind of risks an investor is willing to take.

We’ve said again and again that the most conservative investors should stick to higher-rated fare, which we typically keep as Conservative Holdings. More aggressive investors who don’t mind some exposure to commodity price swings can look at Growth and Aggressive Holdings, but only with the understanding that greater potential returns usually coming with greater potential risks.

The good news is, based on the most recent data, all of our Holdings measure up very well on the quality scale as well as for potential returns. Here’s how they measure up. For trading advice, see the Portfolio tables.

Note that our top recommendation for mutual funds remains Kayne Anderson Energy Total Return Fund (NSYE: KYE). The fund trades at a premium of about 6 percent, modest compared to fund rivals. The key advantage is you won’t have to file a K-1 at tax time, but returns should still be superior buying individual MLPs.

The bottom line is this data should set anyone’s mind at ease when it comes to setting a dream buy limit order. They proved themselves during the 2008-09 bear market crash and the worst economic and credit event in 80 years. And as the numbers show clearly, they’re still doing it with no end in sight.

One other piece of significant news involving MLP Profits companies is a joint venture between Energy Transfer Partners LP (NYSE: ETP) and Regency Energy Partners LP (NSDQ: RGNC) to buy natural gas liquids assets from Louis Dreyfus Highbridge Energy for $1.925 billion. The deal should be accretive to both companies, which share the same general partner, Energy Transfer Equity LP (NYSE: ETE).

Energy Transfer will contribute $1.3 billion to the deal, funded by equity offerings in large part. It will get 70 percent of the venture to Regency’s 30 percent. These assets will generate fee income for both MLPs in the some of the most liquids-rich areas in North America, with numerous opportunities to spur growth down the road.

Energy Transfer Partners is a buy up to 55; Regency Energy Partners is a buy up to 29.

By the Numbers

We’ve less than a month to wait before MLP Profits Portfolio picks start releasing first-quarter numbers and holding conference calls. Announced and approximate reporting dates for each are shown at the end of this report.

The good news is there’s no better portent for what we’re likely to see than the solid numbers we saw in the recently concluded fourth-quarter and full-year 2010 reporting season. We’ve recapped the progress of 14 of our recommended companies as they’ve announced results over the past several weeks. Here are the key facts about the last three to report.

Genesis Energy LP (NYSE: GEL) generated available cash before reserves–the key metric for its profitability and dividend safety–of $29.2 million in the fourth quarter. That was 23.2 percent above last year’s tally. Full-year cash before reserves came in at $101.5 million, up 11.5 percent from 2009 levels. Fourth-quarter distribution coverage was a solid 1.13-to-1.

Net cash provided by operating earnings came in up 64.9 percent for the quarter. That was in large part due to successful expansion of cash-generating assets, as well as improved operating efficiency and better business conditions for existing assets.

In December 2010, Genesis eliminated the incentive distribution rights (IDR) granted its general partner. That should further enhance growth by cutting the partnership’s equity cost of capital. The GP’s income is now derived entirely from the limited partner units’ distribution.

Pipeline transportation, Refinery Services and Industrial Gases revenues all showed substantial boosts in segment margin, pushing total margin up 21.7 percent in the fourth quarter. That offset flat margin for Supply and Logistics, due to lower marketing margins on petroleum products as derivative contracts were rolled over.

This business’ sensitivity to commodity price swings makes income less reliable, though its impact has been reduced by Genesis’ asset expansion. That trend of greater reliance on fee-based businesses is likely to continue in 2011, as expansion continues. The Refinery Services operation is also likely to show stronger profit, as global conditions improve in that industry.

Meanwhile, the acquisition of half of the Cameron Highway Oil Pipeline in the fourth quarter of 2010 will add a full year to earnings as well. That asset is uniquely positioned to pick up fees from the return of deep water energy production, for which the first new permit since BP’s (NYSE: BP) Macondo well blowout was recently granted.

Over the past four years Genesis has invested an average of $300 million a year in its mostly liquids-based midstream asset portfolio. That figures to continue in 2011, helped by a lower cost of capital thanks to the elimination of the IDR. The January distribution boost–the 22nd consecutive quarterly increase–lifted the 2011 payout 11.1 percent above the rate paid in the first quarter of 2010. And further increases are likely, given CEO Grant Sims’ statement during the recent conference call that he’s “comfortable” running coverage ratios of 1.1 to 1.2-to-1.

Like Enterprise Products, Genesis had its own one-day bear market, though not as extreme, as units dipped roughly 10 percent top-to-bottom before bouncing back. That’s a good reason to continue adhering to our buy target of 27 rather than chasing Genesis Energy Partners higher. Those who own it, however, can look forward to a lot more of the same, starting with a likely dividend increase to 41.25 cents per quarter in mid-April.

DCP Midstream Partners LP (NSYE: DPM) also had a mini-bear market this month, falling a couple points on Mar. 10 before snapping back. The stock has since rebounded but is still slightly below our buy target for new investors of 40.

The MLP–a mix of fee-based and commodity price-sensitive midstream energy assets–posted solid fourth-quarter and full-year 2010 results. Full-year distributable cash flow was flat versus last year’s tally, though off roughly 22 percent from fourth quarter 2009. DCF coverage of the distribution was subpar in the fourth quarter at 0.93-to-1 but adequate for the full-year at 1.01-to-1, as management lifted the payout 1.2 percent in January and 3 percent over year-earlier levels. Cash coverage was slightly better at 1.07-to-1.

DCF fell short mainly because of lower pricing spreads for natural gas and lower gas throughput volumes systemwide, offset partly by acquisitions. The company’s greater move into natural gas liquids should further offset weakness in gas in the coming year, as well as weakness in wholesale propane markets.

Fourth-quarter results were less than what some analysts had expected and further point up the sensitivity of DCP to natural gas market conditions. They were, however, in line with what management had guided toward last year, which should set to rest any near-term fear about the distribution from the lower coverage ratios.

DCP completed $400 million in growth capital spending in 2010, roughly half of which were from third-party acquisitions, including increased interest in several natural gas liquids (NGL) midstream assets and a wholesale propane terminal. These are all fee-based assets, which should further stabilize the MLP’s income going forward. And there’s upside as well from increased production of NGLs in several key regions of North America.

DCP’s 2011 forecast for distributable cash flow is based on $4.25 per million British thermal units for natural gas and projects to between $135 million and $150 million. That’s a coverage ratio of 1.13 to 1.25-to-1 for the full year. And it includes organic expansion capital of $35 million to $50 million, as well as $10 million to $15 million in maintenance capital costs. That excludes the impact of potential acquisitions unannounced organic projects, which are basically expansions of existing assets.

Management has targeted 5 percent distribution growth for the full year, acceleration from 2010 and a clear sign of better things to come. Future margin is estimated to be 60 percent from fee-based businesses, up from 45 percent in 2008, adding a greater note of surety to these forecasts. Management has also hedged 70 percent of the commodity price risk from its natural gas liquids business, leaving just 15 percent of margins that can still be affected by commodity price swings.

The upshot is this is a stable business with a bright outlook and considerable upside from continued growth of the NGLs business. That was enhanced by an equity offering of 3.2 million units in early March at the highest unit price for the MLP in three years-plus. DCP’s yield is a bit over 6 percent, less than in prior years when the units sold at a much lower level. But DCP Midstream Partners is a solid buy up to 40 for those who don’t already own it.

Last but not least, Legacy Reserves LP (NSDQ: LGCY) posted an 18 percent boost in fourth-quarter 2010 revenue, fueled by a 5.4 percent boost in oil and gas output and higher realized prices for its liquids output.  Adjusted cash flow surged 11 percent, though distributable cash flow was roughly flat at $21.5 million in the quarter, for a coverage ratio of 0.99-to-1.

Legacy also boosted its proven reserves by 42 percent over December 2009 levels, of which 74 percent are liquids. Much of that came from successful acquisitions of producing properties, including a $100.8 million purchase of lands in the Permian Basin in late December that will add to 2011 earnings. This deal was the second largest in company history and is focused on liquids as well.

Legacy’s increase in its quarterly distribution on Feb. 14 is likely to mark the start of a period of higher dividends. That’s despite the fact that coverage is currently on the low side at 1.06-to-1 for the year. The challenge is finding more liquids-based production areas to buy accretively in an environment where oil and gas liquids are hot. But even should the pace of purchases slow, the company still has $45 million in expected capital budget to “develop a multi-year drilling inventory” in the words of CEO Cary Brown.

Oil production rose 30 percent in 2010 on the addition of oil assets in Wyoming and the Permian Basin of the southwest. That offset a 15 percent drop in natural gas liquids output due to downtime at a gathering system owned by a third party, which should prove temporary in nature.

Ultimately, as is the case with every producer of oil and natural gas, Legacy’s profitability depends on energy prices. Averaged realized selling prices for oil, however, were only $61.68 per barrel in 2010, leaving plenty of upside for this year. Average realized selling prices for natural gas were higher than current market prices but are significantly less important to profitability.

Production costs are another factor to watch, as they rose 22 percent per barrel due to the acquisitions. That’s no big deal now as oil prices rise. But it does demonstrate the higher costs of expansion that remain a challenge to the company’s growth.

Management’s outlook for 2011 is “positive,” as CEO Brown asserted in the MLPs’ fourth-quarter and full-year 2010 conference call. That’s largely due to opportunities to boost production and a solid price environment for liquids. The company has also been able to access capital markets on the most favorable terms in its history in recent months, further enhancing its ability to grow.

Production was 75 percent hedged last year and 71 percent the year before, with a similar amount likely to be locked up this year. Legacy has been very opportunistic in the past taking advantage of market volatility, one reason it’s been able to keep growing. The long-term target payout ratio is 1.2-to-1, which management expects to move closer to this year and in 2012.

Our longstanding buy target on Legacy Reserves LP is 32, and the current price level has the yield about 7 percent. Given the MLP’s ability to grow and benefit from higher oil prices in coming months this remains a solid entry point for those who don’t already own it.

Here’s when to expect the next round of earnings from MLP Profits Portfolio Holdings. We’ll highlight most of them in regular articles and via Alert where circumstances warrant. “Estimate” indicates a date that, where management hasn’t set a specific announcement plant, is within a reasonable range established by prior reporting habits.

Conservative Holdings

• Enterprise Products Partners (NYSE: EPD)–Apr. 26
• Genesis Energy Partners LP (NYSE: GEL)–May 6 (estimate)
• Kinder Morgan Energy Partners LP (NYSE: KMP)–Apr. 20
• Magellan Midstream Partners LP (NYSE: MMP)–May 4 (estimate)
• Spectra Energy Partners LP (NYSE: SEP)–May 5 (estimate)
• Sunoco Logistics Partners LP (NYSE: SXL)–Apr. 27 (estimate)

Growth Holdings

• DCP Midstream Partners LP (NYSE: DPM)–May 5 (estimate)
• Energy Transfer Partners LP (NYSE: ETP)–May 6 (estimate)
• Inergy LP (NYSE: NRGY)–May 4 (estimate)
• Kayne Anderson Energy Total Return (NYSE: KYE)–N/A
• Targa Resources Partners LP (NYSE: NGLS)–May 5 (estimate)
• Teekay LNG Partners LP (NYSE: TGP)–May 13 (estimate)

Aggressive Holdings

• Encore Energy Partners LP (NYSE: ENP)–May 6 (estimate)
• Legacy Reserves LP (NSDQ: LGCY)–May 5 (estimate)
• Linn Energy LLC (NSDQ: LINE)–Apr. 29 (estimate)
• Navios Maritime Partners LP (NYSE: NMM)–Apr. 28 (estimate)
• Penn Virginia Resource Partners LP (NYSE: PVR)–May 5 (estimate)
• Regency Energy Partners LP (NSDQ: RGNC)–May 6 (estimate)