The Alerian Master Limited Partnerships ("MLP") Index has been on fire recently and is up over 18% since early October. While the index is technically overbought right now, we think that the strong trend in MLPs will continue into 2012 and we would be a buyer on any meaningful pullback.
High Yield in a Slow Growth World
With the cloud of uncertainty currently hanging over the market and the economy, MLPs are one asset class that you can rely on for stable and consistent income. As shown in the chart below, MLPs continue to outperform other yield-driven indexes like the FTSE NAREIT Index and the S&P 500 Utilities Index.
MLPs generally offer stable yields that are typically higher than those of common stocks. In addition, MLP returns have traditionally had low correlations with stocks and bonds, making them good portfolio diversification assets (especially in times of economic uncertainty).
As highlighted in Standard & Poor's Guide to MLPs, MLPs offer investors three distinct positive characteristics:
- Tax Treatment - Since MLPs are structured as partnerships they do not pay corporate income taxes. Taxes are only paid when distributions are received, thus avoiding the double taxation faced by investors in corporations.
- Consistent Distributions - MLPs face stringent provisions including the requirement to pay minimum quarterly distributions to limited partners, by contract. Thus, the distributions of MLPs are very predictable.
- Energy Infrastructure – The majority of MLPs operate in the energy sector, particularly in energy infrastructure industries such as pipelines, which provide stable income streams. The performance of companies in the energy infrastructure industry is not highly correlated with the price of oil and other types of energy, but rather with the demand for energy. The demand for energy is far less volatile than commodity energy prices and generally increases steadily over time, resulting in steady, predictable cash flows for companies in these industries.
Large Cap Diversified MLPs
Below is a list of the seven largest MLPs, which have an average dividend yield of 5.6% and average beta of 0.53. In general, companies with low betas will tend to be less volatile than the general market and will help dampen portfolio volatility.
Stable and Predictable Dividends for Retirees
Through thick and thin over the past 10 years, MLP dividends have been as stable as they come (see table below). Not one of these MLPs have cut their dividend in the last 10 years.