It could take years for the market to make up for lost ground. In the meantime, Barron's Dimitra Defrotis touts the benefits of master limited partnerships.
Master limited partnerships, or MLPs, usually invest in energy assets like oil fields and natural-gas processors. The majority of their profits are passed along to investors as tax-deferred distributions, and many are now boasting yields around 11%. The Alerian Capital index of MLPs is down 44% this year, but the upshot is that as MLP prices fall, payouts rise. Citigroup thinks its list of 36 MLPs could yield annual returns of 84%.
Investors do need to be selective. Some MLPs have seen a sell-off because they're highly leveraged or because of volatile commodity prices, and others have been hurt as hedge funds unwound energy positions, but pipeline owners have been unfairly dumped along with the rest. Three pipeline partnerships stand out in particular, Enterprise Products Partners (NYSE:EPD), Energy Transfer Partners (NYSE:ETP) and Boardwalk Pipeline Partners (NYSE:BWP), and Citigroup thinks the pipeline group could see 63% returns over the next twelve months.
El Paso Pipeline (NYSE:EPB), an MLP with a fee-based cash flow, offers a 9% yield and should generate 10% compound annual growth in distributions over the next five years. It has a reasonable debt level of 54%, and Wachovia believes the stock is worth almost twice its current trading price of around $13.
An alternative to a direct MLP investment, especially for those investors averse to the annual tax filings MLPs require, is to invest in the MLP's general partner. Timothy Call, of Capital Management Corp., expects returns to grow at OneOk Partners (NYSE:OKS) but prefers to own shares in its general partner OneOk (NYSE:OKE).
A third option is to invest in exchange-traded MLP funds. Trading at a discount to their net asset value, BearLinx Alerian MLP Select Index (BSR) has a 10% yield and MLP & Strategic Equity Fund (NYSE:MTP) has around a 14% yield.
Seth Glickenhaus, chief investment officer at Glickenhaus & Co., says MLPs "have lost more than half their value in many cases, and I would say they could go up 25% easily."