In today's rate environment, investors are in search of alternatives to ultra-low yields on government securities. This week the 10-year U.S. Treasury reached 1.44% while the 10-year German Bund reached even lower levels. I believe investors are panicking into so-called safe government securities. Investors are buying securities that will not keep up with inflation. I believe there are interesting alternatives for long-term investors.
Master Limited Partnerships (MLPS) provide investors income-generating assets with strong secular industry tailwinds. The majority of MLPs are pipeline businesses, which earn stable income from the transport of oil, gasoline or natural gas. Energy MLPs are defined as owning energy infrastructure in the U.S., including pipelines, natural gas, gasoline, oil, storage, terminals and processing plants.
Midstream MLPs own critical energy infrastructure that possesses limited commodity price exposure and produces stable cash flow for owners.
MLPs provide investors attractive current income with an embedded inflation hedge. MLPs combine the tax benefits of a limited partnership with the liquidity of publicly traded securities.
As opposed to a corporation, a MLP is considered to be the aggregate of its partners rather than a separate entity. MLPs provide for pass-through income, thus they are not subject to income taxes at the corporate level. Owners of an MLP are responsible for paying taxes on their percentage of the MLP's income. This eliminates the double taxation typically applied to corporations.
Advantages of investing in MLPs
- Approximately 65% of the industry's revenue comes from fees, many based on government-regulated rates
- Contracts typically have inflation hedges embedded within them
- Companies typically have monopolies in their specific region
- Long-term demand is stable and relatively inelastic
In addition to providing strong dividend yields and an inflation hedge, the basket of MLPs outlined herein has outperformed the S&P 500 (SPY) over the last three years, during the market recovery.
In a highly correlated, "risk-on, risk-off" world, MLPs provide access to asset classes that are less correlated to stocks and bonds. MLPs have only modest direct commodity sensitivity, as the company's business model is derived from fee-based contracts that are largely insensitive to commodity price fluctuations. The stable cash flows from fee-based contracts provide stable and strong dividends for shareholders.
MLPs are a limited partnership that are publicly traded on a securities exchange. MLPs combine the tax benefits of a limited partnership with the liquidity of publicly traded securities. MLPs provide access to a low-beta asset class with rich dividend yields.
Smaller Cap MLP screen criteria
- Market capitalization less than $10 billion
- Dividend yield greater than 6.0%
Investors who are not interested in picking specific equities can buy a basket of MLPs with exchange traded funds such as the Alerian MLP ETF (AMLP).
Boardwalk Pipeline Partners, LP (BWP)
Market Capitalization: $5.5 billion
Dividend Yield: 8.0%
EV / EBITDA: 13.8x
Atlas Pipeline Partners LP (APL)
Market Capitalization: $1.6 billion
Dividend Yield: 7.6%
EV / EBITDA: 12.4x
El Paso Pipeline Partners, L.P. (EPB)
Market Capitalization: $6.8 billion
Dividend Yield: 6.1%
EV / EBITDA: 9.1x
MarkWest Energy Partners, L.P. (MWE)
Market Capitalization: $5.4 billion
Dividend Yield: 6.4%
EV / EBITDA: 11.7x
Regency Energy Partners LP (RGP)
Market Capitalization: $3.8 billion
Dividend Yield: 8.2%
EV / EBITDA: 16.7x