In a low interest rate regime, investors seeking strong income from their investments should look at Master Limited Partnerships (MLPs). MLPs provide investors income-generating assets with strong secular industry tailwinds. Wall Street analysts are extending their ultra-low rate views and are projecting rates to remain low until 2015. 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 this basket of MLPs:
- 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 distribution yields and an inflation hedge, the basket of MLPs outlined herein has outperformed the S&P 500 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 limited partnerships that are publicly traded on a securities exchange. They 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.
MLP screen criteria:
Market capitalization greater than $3.5 billion
Beta is below 1.0
Distribution / "Dividend" yield greater than 4.0%
Investing in well capitalized companies is important to ensure ongoing distributions. 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 (NYSEARCA:AMLP).
Boardwalk Pipeline Partners, LP (NYSE:BWP)
Market Capitalization: $6.0 billion
Dividend Yield: 7.4%
EV / EBITDA: 14.6x
Kinder Morgan Energy Partners LP (NYSE:KMP)
Market Capitalization: $29.1 billion
Dividend Yield: 5.7%
EV / EBITDA: 12.2x
Kinder Morgan, Inc. (NYSE:KMI)
Market Capitalization: $38.5 billion
Dividend Yield: 4.0%
EV / EBITDA: 25.8x
Buckeye Partners LP (NYSE:BPL)
Market Capitalization: $5.2 billion
Dividend Yield: 7.7%
EV / EBITDA: 16.3x
Enterprise Products Partners LP (NYSE:EPD)
Market Capitalization: $48.3 billion
Dividend Yield: 4.6%
EV / EBITDA: 15.5x
Williams Partners L.P. (NYSE:WPZ)
Market Capitalization: $17.6 billion
Dividend Yield: 5.6%
EV / EBITDA: 10.0x
Plains All American Pipeline, L.P. (NYSE:PAA)
Market Capitalization: $14.2 billion
Dividend Yield: 4.8%
EV / EBITDA: 13.6x
Energy Transfer Partners, L.P. (NYSE:ETP)
Market Capitalization: $11.1 billion
Dividend Yield: 7.8%
EV / EBITDA: 12.5x
Additional disclosure: Long KMI Warrants