Thus far in 2013 MLP Profits Portfolio Holdings have returned an average of 13.9 percent. Predictably, picks perceived as safest were the top draws, by a wide margin.

It’s hard to pinpoint a specific catalyst for top performer Genesis Energy LP’s (NYSE: GEL) nearly uninterrupted rise. The fee-focused midstream company has announced a solid stream of good news, including a major project with Exxon Mobil Corp (NYSE: XOM), solid results for the fourth quarter of 2012 and the 25th of 30 consecutive quarterly distribution increases at an annualized rate of 10 percent or greater.

But Genesis has been giving out this kind of good news since we first picked it up nearly four years ago. The only thing really new here is investors’ willingness to bid its units to an all-time high, where it yields barely 4 percent.

There’s no doubt many will pay much more for MLPs that are growing distributions now, or even for the promise of future growth. In fact the catalyst for our second-best performer this year, Buckeye Partners LP (NYSE: BPL), isn’t an actual distribution boost at all, but management’s promise to resume distribution growth by early 2014.

In the long run all dividend-paying equities–including MLPs–follow their companies’ dividend growth. That’s axiomatic, as a higher payout means the MLP returns more on a regular basis and is therefore worth more to investors.

A rising distribution is also a sign of dividend safety. It’s the clearest signal of management confidence that the underlying business is healthy and will continue to grow. And in a market where we’ve seen some dividend cuts and will likely see more this matters a lot.

Our MLP Profits Safety Rating System accords a full point for companies that have increased distributions at least once over the past 12 months. There are also points awarded for distributable cash flow coverage of the payout, revenue stability and near-term debt maturities.

The more points an MLP scores, the higher its rating and the safer we deem it to be. Our goal is then to find the cheapest stocks for each level of risk.

Not every stock is suitable for every investor. Nothing is ever 100 percent safe. And even an MLP that’s currently covering and growing distributions may stumble, despite management’s repeated assurances to the contrary.

That’s why we diversify and balance Holdings, so the inevitable blowups won’t overly damage the overall Portfolio.

The point of a ratings system isn’t to completely factor out danger or to provide some sort of guarantee of impregnability. Rather, it’s to lay out what the risks are in graphic relief, so investors can make their own decision about whether they want to take them.

Take the case of Aggressive Holding PVR Partners LP (NYSE: PVR). The energy midstream/coal mining company raised its distribution by a penny in late January to USD0.55 per unit. That’s the MLP’s eighth consecutive quarterly boost, all by a penny a unit, and it earns it a point under our Rating System.

On the other hand, PVR’s distributable cash flow hasn’t been covering its distribution recently. That was again the case in the fourth quarter of 2012, as growth of the company’s energy midstream business lagged previous estimates and profits from coal royalty sales fell, both from lower selling prices and volumes mined on its lands.

By continuing to raise the distribution, management is putting its money where its mouth is–that is repeated assertions that operations will improve in 2013, mostly recently made during the conference call held Feb. 20.

But the fact that distributable cash flow isn’t now covering the payout means there is a contingency for continued growth, i.e. management remaining optimistic on an eventual recovery.

PVR is very likely the highest potential reward MLP in the Portfolio. At this point, there’s a fair amount of skepticism about whether cash flow will recover fast enough in 2013 for management to keep raising distributions each quarter. But if the company is indeed successful the unit price is almost surely headed back to the high 20s, in addition to paying a nearly 10 percent distribution at current levels.

The risk: Cash flow fails to recover and management is forced to cut the distribution to a level that’s better supported. That would almost certainly take the price down to at least the high teens, and quite possibly lower. Although there’s no question of PVR’s solvency or the high quality of its assets, recovery from there would almost surely take a while.

PVR is a suitable holding only for those willing to take the risk for the promise of higher reward. And the same thing applies for the rest of the Portfolio recommendations rated “2” or lower.

In stark contrast, investors can be considerably more confident about the prospects for the 14 MLPs that have both raised distributions over the past year and covered them with distributable cash flow.

There are no guarantees there won’t be slippage down the road even with these highly rated fare. But at this point there’s also no additional contingency, as is the case with PVR. And that means they’re higher-percentage bets.

The point is there are bargains on both sides.

“Safety” is popular now for good reason. But be sure to choose what suits you best.

In This Issue

All of our MLP Profits Portfolio Holdings have reported fourth-quarter and full-year 2012 numbers. Not a one cut its distribution, and the prevailing trend suggests payout growth for most will continue.  See Portfolio Update.

One is cheap because of renewed questions about accounting practices, but it just completed a game-changing acquisition. The other continues what’s already been a successful transition in its business model. Both are solid long-term buys for new money. See Best Buys.

Although conditions aren’t exactly ideal, weather and commodity-price trends are working in retail propane distributors’ favor. See Sector Spotlight.