Safe 12% to 25% Yields Available From This Unique Investment
October 3, 2018
These Stocks Pay Up to 25%
Today, investors have an incredible opportunity to earn double-digit yields. You simply have to look past traditional industries like utilities and consumer staples. Instead, I’m looking at a smaller section of the investment world named “master limited partnerships” (MLPs).
MLPs always enjoy strong demand, even in recessions. As I’ll show you, this type of investment now pays out safe income streams of up to 25%. And they’re great for income investors.
A master limited partnership is a unique type of energy company that typically owns pipelines or other infrastructure properties. Institutional investors have long prized these businesses for their various benefits.
One such advantage stems from pipelines constituting the “toll roads” of the energy patch. They get paid a fee for every barrel of crude oil that’s shipped or stored in their infrastructure.
Such deals typically get done on a long-term basis. Most pipeline owners force oil producers to sign contracts of up to 10 years (or even longer), often baking inflation adjustments right into the agreements. As a result, pipeline owners can often determine years in advance the dates on which they’ll get paid.
In other words, these businesses make steady profits whether oil trades at $30.00 a barrel or $300.00. And in order to encourage new investment, the U.S. government offers pipeline owners generous tax breaks on any income paid out as dividends. That means most of an MLP’s profits get passed on to investors through cash payouts.
The thing is, pipeline share values can fall with energy prices too. Over the last two years, the benchmark U.S. oil price has plunged from its all-time highs. Meanwhile, regulatory uncertainty, higher interest rates, and better returns in the tech sector have triggered an exodus of investors out of pipeline names.
Shares of pipeline giants like Enbridge Inc (NYSE:ENB) and TransCanada Corporation (NYSE:TRP) have gotten smoked this year. Alerian MLP (NYSEARCA:AMLP), which owns a basket of the largest publicly traded pipeline partnerships, has dropped over 40% from its all-time highs in 2014.
Yet, despite the doom and gloom surrounding the industry, America’s shale oil boom continues. Pipeline businesses will enjoy growing demand for their services over the decades to come.
This has made pipeline stocks cheap. Today, the industry trades at a discount compared to the broader market, on the basis of price to projected funds from operations over the following year. We have only seen pipeline stocks this cheap on two previous occasions, which preceded massive rallies over the following six months.
In the meantime, “Mr. Market” will pay investors well while they wait. In the pipeline business, it’s not uncommon to find yields as high as 25% right now. Take a look:
|
Company Name & Stock Ticker |
Market Cap |
Yield |
|
Enbridge Energy Partners, L.P. (NYSE:EEP) |
$4.9 Billion |
12.8% |
|
Blueknight Energy Partners LP (NASDAQ:BKEP) |
$97.4 Million |
13.9% |
|
Buckeye Partners, L.P. (NYSE:BPL) |
$5.6 Billion |
14.3% |
|
Martin Midstream Partners L.P. (NASDAQ:MMLP) |
$459.4 Million |
18.1% |
|
American Midstream Partners LP (NYSE:AMID) |
$334.5 Million |
26.4% |
(Source: Yahoo! Finance, last accessed October 2, 2018.)
I don’t expect these deals to last much longer. Last quarter, billionaire energy mogul T. Boone Pickens plowed millions of dollars into a number of pipeline partnerships. Other well-known investors, including Jim Simons, Bill Miller, and George Soros, have also quietly built up positions in this industry.
What could all of these well-respected businessmen see in pipelines right now? I’d say it means one thing: they see a lot more upside ahead.
