With the price of most Master Limited Partnerships falling in the past few weeks the same amount as the Dow (both were down about 17% this month), this makes MLPs a great buying opportunity and a chance to pick up a 12.5-17% effective yield over the next year, if you get in soon. What’s more, MLPs have great potential to increase their dividend yield over time because of the types of businesses they are in (energy transport), and their fees are indexed to inflation. If MLPs had been priced this low on August 2nd (when I was conducting the research for that article) I would have included them for my “Ideal Dividend Portfolio” article. By including MLPs in the portfolio, diversification will be greatly increased, and risk will be reduced.
For those who have not heard of Master Limited Partnerships, let me give you a brief summary of what they are, what they do, and how they do it. MLPs are companies that are composed of one general partner, usually the partner that operates the business, and a large number of limited partners. The limited partner shares (or units in MLP speak) are traded on exchanges and are very liquid (unlike most partnerships). An MLP is mandated by law to operate in only a few types of businesses, almost always having to do with the utilities. The MLPs I will recommend transports oil, gas, liquid petroleum as well as or other types of energy.
The best part of MLPs is their business model. They never own the commodity they are transporting, so they do not have to deal with bubbles/spikes in the price of those commodities. Their transportation fees are indexed to inflation, so an investment in an MLP could be considered a hedge against inflation for your income portfolio. They also usually operate as a regional monopoly, so the threat of competition is not high.
Before the current market downturn, I recommended one type of investment mainly, mREITs. For those of you who would prefer more diversification and less risk than my original portfolio I would suggest allocating as much as 40% of your allocation to MLPs. That would give you 40% in mREITs, 40% in MLPs, and 20% in high-yield blue-chips. If you would like to view my original dividend portfolio, check it out here.
In order to make the changes that have been described above, I would decrease the assets allocated to each mREIT by 7%, so that each mREIT held 8% of your total assets. I would then allocate 10% of the portfolio’s assets to each of the following MLPs:
· Energy Transfer Partners (NYSE:ETP)
· Plains All American Pipeline (NYSE:PAA)
· Atlas Pipeline Partners (NYSE:APL)
· Suburban Propane Partners (NYSE:SPH)
Energy Transfer Partners (ETP) is currently paying an 8% dividend, and has suffered a $4 per unit decrease in price because of the recent market turmoil. Assuming that ETP recovers from this recent crisis as the markets do, investors who buy today will gain a ~17% effective yield. ETP primarily conducts compression and transportation services for the natural gas industry.
Plains All American Pipeline (PAA) is currently paying a 6.45% dividend and lost $3.45 per unit during the current market downturn. Making the same assumptions as with ETP, today’s investors will have a 12.5% effective yield in the next year.
Atlas Pipeline Partners (APL) is currently paying a 5.91% dividend and has suffered a $3.06 loss during this downturn. Assuming that this MLP takes back its losses in the next year, today’s investors will capture a 15.5% yield over the next year. APL provides natural gas gathering services in the eastern half of the state.
Suburban Propane Partners (SPH) is paying a 7.3% dividend and has lost about $4.40 in the last month. Investors stand to make a 16.7% gain in the next year as this MLP rebounds. This partnership specializes in distributing propane, fuel oil, and refined fuels.
If the risk in “My Ideal Dividend Portfolio” was too high for your taste, I would recommend adding the four MLPs that I have suggested here. Part of the appeal of these four MLPs is that they can be purchased while their price has been beaten down because of the debt crisis and volatility that was introduced to the markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.