For the past year, MLP yields have been hovering near the lower end of their historical range, although they were still more attractive than stocks. With the recent selloff in markets, MLPs are beginning to look more interesting on an absolute basis with yields considerably closer to average levels. While there is the possibility that prices will fall further, I think it may be time to start buying a small position.
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The yield on the Alerian MLP index currently stands at 6.93% compared to an historical average of 7.77%. If it were to yield the historical average today, it would have to drop by about 11%. While an 11% drop is not an inconsiderable risk, in my opinion it is small enough that taking a partial position, then buying more if/when MLPs decline further, is a smart move, particularly in light of the fact that almost all other asset classes look overvalued.
Consider REITs, for instance. The FTSE NAREIT index only yields around 4.9%, compared to a 6.23% average since 1995, the same time frame as used for the MLP average. This would require a 21% drop if REITs were to yield 6.23%.
If you compare MLPs to bonds, they look far more favorable right now. 10-year treasuries yield close to 2.2%. Not only do MLPs have a much higher yield, they also provide some inflation protection as their assets throw off more earnings, and thus dividends, as prices rise.
Stocks don't appear much better, either. Using metrics such as the Shiller P/E or Tobin's Q suggests that stocks are roughly 20% overvalued. Of course, if we look into more specific sectors, we will find some that are undervalued, as high quality stocks look to be, but overall, most investment options are considerably overvalued compared to MLPs.
Altogether, I think that MLPs are one of the most attractive assets to own right now. Their yields, while slightly lower than the historical average, still look favorable when compared to the overvalued state of many other assets. Investors looking to gain easy exposure to MLPs can look at the JPMorgan Alerian MLP ETN (NYSEARCA:AMJ) or the Credit Suisse Cushing 30 MLP ETN (NYSEARCA:MLPN). AMJ is larger and more liquid, but I like the fact that MLPN's index is equal weighted and relies on fundamentals to decide which MLPs are in it.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MLPN over the next 72 hours.