Thursday October 06, 2011
by Benjamin Shepherd, contributing editor Passport to Profits
In this low interest rate environment, it’s been tough for income investors to find worthwhile payouts that don’t entail inordinate amounts of risk.
But there’s one income-producing sector that has become increasingly attractive as the markets have sold off -- midstream master limited partnerships.
These midstream MLPs operate the pipeline and storage infrastructure for our oil, gasoline and natural gas resources.
They’re an extremely attractive way to play both growing energy demand and the need for greater investment in the US energy infrastructure.
Even better, midstream MLPs avoid direct exposure to volatile commodity prices because they’re paid based on the volumes they move rather than on the price of oil or natural gas.
As a result, most MLPs are able to pay extremely attractive dividends both in terms of absolute yield and consistency of payout.
The best way to gain exposure to the theme is through ALPS Alerian MLP ETF (AMLP).
The fund holds a capitalization-weighted portfolio of 25 midstream MLPs, including names such as Enterprise Products Partners, Kinder Morgan Energy Partners and Magellan Midstream Partners.
ALPS Alerian MLP ETF is currently the least volatile exchange-traded product tracking the MLP space; its standard deviation runs at 8.07 percent and its beta is 0.63.
By comparison, the S&P 500’s standard deviation is currently in excess of 21 percent. Meanwhile, the fund currently yields 6.4 percent, one of the highest yields in the ETF universe.
The reason for such an impressive payout is the structure of MLPs; they’re not subject to corporate-level income tax, so most of their income is passed along to investors.
But this isn’t a case of questionable companies making higher distributions just to attract investors; these are strong companies that take advantage of a unique structure to maximize unit-holder returns.
We expect the MLP sector will benefit greatly from America’s energy infrastructure demands.
The major reason natural gas prices in the US are so low--currently around $4 per million British thermal units--is that the infrastructure is not yet in place to easily move excess supply to areas of the country where demand is greatest.
Crude oil supplies in the US face a similar lack of mobility. As a result, there are a number of new pipelines in the works, and MLPs are in the best position to build them.
Even during the darkest days of the financial crisis, most MLPs were able to tap the capital markets and secure financing at favorable terms.
They should be able to secure the funding necessary to complete pipeline projects regardless of the economic climate. That will be a major boon for the sector as energy demand continues growing.
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