Dividend sustainability has been an issue for master limited partnership (MLP) Plains All American Pipeline (PAA 4.00%) and its general partner (GP) Plains GP Holdings (PAGP 4.22%) over the years. The MLP has cut its distribution several times over the years due to earnings volatility and balance sheet issues, causing its GP to cut its dividend.

However, Plains All American Pipeline has taken several steps to reduce its earnings volatility and leverage ratio. Those actions have paid big dividends for investors, as the MLP has steadily rebuilt its payment level. That payout -- which yields over 8% at PAA and is more than 7.5% at PAGP -- is now growing even stronger after the oil pipeline company agreed to sell its Canadian natural gas liquids (NGLs) business for nearly $3.8 billion. It makes these high-yielding dividend stocks a lot safer for income-seeking investors.

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Drilling down into the deal

Plains All American has agreed to sell nearly all of its NGL business to Keyera for about 5.15 billion Canadian dollars (US$3.8 billion). It will retain most of its U.S. NGL business and all its crude oil assets in Canada.

The deal has several benefits, including:

• Sharpen its focus: Plains will become even more of a pure-play crude oil midstream company.
• Reduce earnings volatility: The Canadian NGL business had direct exposure to commodity price volatility, which caused fluctuations in Plains' earnings.
• A strong exit point: The MLP is selling the business at 13 times free cash flow, which is a strong valuation.
• Enhanced free cash flow: Plains will produce more excess free cash flow in the future due to lower capital investments and taxes related to the Canadian NGL business.
• Increased financial flexibility: The MLP expects to net about $3 billion in proceeds from the sale after taxes, transaction expenses, and a potential one-time special distribution to investors to offset their tax liability related to the sale.

Following the transaction, Plains All American Pipeline will produce more durable cash flows to support its distribution payments. It expects to get 85% of its earnings from predictable fee-for-service agreements, up from 80% before the deal.

It will also have an even stronger financial profile. The MLP expects its leverage ratio to be at or below the low end of its 3.25-3.75 times target range (it was 3.3x at the end of the first quarter). Plains can use its enhanced financial flexibility to make bolt-on acquisitions, repurchase preferred units, and buy back common units.

Income growth machines

The sale of Plains' Canadian NGL business continues its transformational strategy to enhance its free cash flow and reduce its leverage ratio so that it can pay a sustainable, growing distribution. This strategy has delivered results. The company has generated a cumulative $8.3 billion of adjusted free cash flow since 2021, which has enabled it to repay debt and grow its distribution. Its leverage ratio has declined by 31%, while the MLP has grown its payout at a 21% compound annual rate.

Plains had planned to continue increasing its payout at a healthy rate until it reached its target payout level (about 1.6 times coverage). With its coverage level expected to be around 1.75x this year, Plains estimated that it could increase its payout at around a 10% annual rate in 2026 and beyond before eventually hitting its targeted payout level. While the sale of its Canadian assets will initially cause it to generate less free cash flow this year, it can offset the lost income by wisely allocating the proceeds from the sale to increase its free cash flow per unit.

The MLP has a strong record of making accretive investments. For example, earlier this year, Plains bought Ironwood Midstream Energy, Medallion Midstream's Delaware Basin crude oil gathering business, and the remaining 50% interest in the Midway Pipeline for a combined $670 million. In addition, the MLP spent $330 million to repurchase 18% of its Series A Preferred Units. These transactions boosted its free cash flow, enabling Plains to hike its distribution payment by 20%.

Even lower-risk income stocks

Plains All American Pipeline has taken significant strides to enhance the durability of its cash flows while reducing its leverage ratio. As a result, its high-yielding payout is on a much more sustainable level, which has also enhanced the safety of Plains GP Holdings' dividend. Because of that, they're attractive options for those seeking a sustainable and steadily rising income stream.

Plains All American is best for those desiring a higher yield and are comfortable dealing with the potential tax complications of the Schedule K-1 federal tax form the MLP sends its investors each year. Meanwhile, Plains GP Holdings is best for those seeking ease in filing their taxes with a Form 1099-DIV.