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With clouds of uncertainty currently hanging over the market and the economy, Master Limited Partnerships (MLPs) are one asset class that retirees can rely on for stable and consistent income. In the absence of a significant deterioration in economic conditions from the current levels, we continue to believe that MLPs represent solid income-generating assets, with great industry fundamentals.

MLP Overview

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:

  1. 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.
  2. 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.
  3. 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.


Recent performance

The Alerian MLP Index is in a very strong long-term up trend, but the index has sold off recently as bond yields have crept higher. However, we believe that interest rates will remain low in 2012 and we would be buyers of large-cap MLPs on any further weakness.

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Large-cap diversified MLPs

Below is a list of five of the largest MLPs, which have an average dividend yield of 6.0% and average beta of 0.68. 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 distributions have been as stable as they come (see table below). Not one of these MLPs have cut their distributions in the last 10 years.

Current "buy zones"

Most of the stocks below are currently in a positive uptrend. As such, investors should be looking for near-term areas of support as potential entry points.

Enbridge Energy Partners (EEP) has been on a very strong run since early October. The 50-day moving average crossed over the 200-day moving average in December, which is a long-term bullish signal. EEP recently dipped below the 50-day, but we believe that the stock will get some strong support around the 200-day moving average ($29.33).

Buy Zone: $29.00-$31.00

Energy Transfer Partners (ETP) experienced a bullish crossover in January, but the stock has recently dipped back below the 50-day moving average. We think that the stock could pull back a little more from current levels, but the long-term positive trend should remain in place. The 200-day moving average ($44.33) should offer strong near-term support.

Buy Zone: $44.00-$46.00

Enterprise Products Partners (EPD) is currently consolidating after a very strong run since October. We would be buyers if the stock dips below the 50-day moving average ($49.88).

Buy Zone: $47.00-$49.00

Kinder Morgan Energy Partners (KMP) is currently in the midst of a healthy pullback since peaking over $90 in late February. The stock is technically oversold right now, but we are optimistically waiting for KMP to enter our "buy zone." One more decent down day should do the trick.

Buy Zone: $78.00-$80.00

Plains All American Pipeline (PAA) has been the strongest of all the MLPs as the stock is up over 40% since October. That said, the long-term trend is very strong and we believe that it should continue in 2012. We would be buyers if the stock dipped below the 50-day moving average ($77.95). Note: We recently raised our "buy zone" target for PAA due to the continued strength in the stock (our previous "buy zone" in early February was $66.00-$68.00).

Buy Zone: $74.00-$77.00

Disclosure: I am long PAA.

Source: Retirees Should Buy The Dip In These 5 Large-Cap MLPs