Further to my recent primer on MLPs, where I presented the asset class and highlighted several larger Oil & Gas MLPs, this article introduces six mid-cap MLPS with a yield of at least 6%. As you go smaller in size, MLP yield and/or risk is often higher. The listed MLPs have a capitalization between $3 & $8 billion, with yields between 6.3% and 7%. If you are unfamiliar with MLPs, please read the above-mentioned article
Why Mid-Cap MLPs?
MLPs are a growing asset class. There are a few giants in the business. These middle-sized MLPs may be preferable because it is far easier for them to grow. Simply put, a $3 billion-sized company goes up by 33% if another billion enters it, while a $10 billion-sized company would only go up 10% in that situation. Such amount leaving, of course, would go down by the same percentages. That is a risk.
There has been significant growth in interest for this asset class. This growth in interest is most notably by individuals at or near retirement age that are looking for higher yield options in a low yield world. These complanies have appreciated with the oil markets, and may be overvalued in the short term. Nonetheless, as more money comes into the MLP asset class in search of income, it is likely that M&A activity will begin to heat up within the industry. Such M&A activity tends to benefit the smaller market participants, as they are acquired by the larger participants.
Another reason why the mid-cap MLPs may outperform the larger ones is because they are less followed. As MLPs become more accepted by the general market and their ownership becomes more common, their technical success becomes more at the mercy of market trends. Smaller companies that are less covered by Wall Street may, therefore, trade at preferable valuations to the larger ones. The same holds to a greater extent for small-cap MLPs. They may also later benefit technically from Wall Street Coverage. As this is not a fundamental characteristic, it is difficult to quantify.
Six Mid-Cap MLPs That Currently Yield over 6%
Boardwalk Pipeline Partners LP (NYSE:BWP)
Market Capitalization: $5.62 billion
Debt: $3.27 billion
Buckeye Partners LP (NYSE:BPL)
Market Capitalization: $5.83 billion
Debt: $2.64 billion
Enbridge Energy Partners LP (NYSE:EEP)
Market Capitalization: $7.9 billion
Debt: $5.25 billion
Nustar Energy LP (NYSE:NS)
Market Capitalization: $4.1 billion
Debt: $2.4 billion
Plains All American Pipeline LP (NYSE:PAA)
Market Capitalization: $9.25 billion
Debt: $5.59 billion
Regency Energy Partners LP (RGNC)
Market Capitalization: $3.5 billion
Debt: $1.22 billion
Many of these names, like the larger MLPs, have appreciated considerably over the past year. Due to this often dramatic appreciation, it may be wise to prepare a list of those with characteristics you like and watch them for a better entry price. Of course, if you chose that course of action six months ago, you probably would have missed out on some decent growth and/or distributions.
MLPs and Taxation
MLPs are partnerships, so they do not pay corporate income taxes, on either a state or federal basis. They are fairly similar in this regard to the once great Canadian Royalty Trusts (Canroys) that Canada recently eliminated, forcing restructuring. Additionally, the investing limited partner might be able to record a pro-rated share of any depreciation to reduce tax liability. However, this theoretical advantage does not exist where the MLP is held in a tax-deferred account, such as an IRA. Nonetheless, they are often effectively used in IRAs for their high yield characteristic alone.
The tax liability of the MLP is passed on to its holders. Each investor receives a K-1 statement that details their share of the partnership's net income. That income is then taxed at the investor's individual tax rate. The MLP may also make cash distributions that are not taxed received, but reduce the cost of partnership shares/units and create a tax liability that is deferred until the MLP is sold.
An ETF and Why CEFs are an Issue
I would also like to mention that the ALPS Alerian MLP ETF (NYSEARCA:AMLP) is an ETF that provides exposure to a basket of MLPs that is supposed to correspond to and track the Alarian MLP Infrastructure Index. The annual expense ratio is listed as 0.85%, which is slightly above average for an indexing ETF, but this option may be preferable to individuals that desire diverse exposure to the asset class, or to those that do not feel confident picking and choosing individual names within the asset class.
There are also some newer MLP Closed End Fund (CEF) options that many may prefer because they are designed to produce a 1099 rather than a K-1. These CEFs are usually preferred by individuals that want to hold MLP exposure in an IRA or those that just don’t want to file a K-1. While there may be some reasons to hold such a CEF, their corporate structure essentially counters the tax pass-through characteristic of the investment plus expenses. If that was a good idea, why wouldn't these businesses structure themselves as corporations?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Investments should be considered on their own merit and relative to the total portfolio of investments.