3 MLPs Perfect for Retirement Income

Three reliable MLPs with high yields ideal for the income-oriented investor.

Jun 11, 2014 at 11:53AM

So you want a high yield and stability all wrapped into a long-term investment that you can depend on for years to come? You're in the right place.

Often a high yield connotes some increased element of risk, which can make finding the perfect balance a bit tricky. Currently some of the highest yields in the market are found in some of the most beaten-down sectors such as steel, coal, metal miners, shippers, etc. While the double-digit yields some companies offer may look attractive, many are not reliable going forward and place the invested capital at significant risk.

But don't despair, because if you look hard enough, you can always find the needle in the haystack -- and here are three such needles with minimal risk and high yields. Not surprisingly, they are located in the MLP space, which combines tax efficiency and a predetermined distribution contract with unitholders, making for reliable income. Of all the MLPs, midstream MLPs are my personal favorites.

I often compare midstream assets to railroads. They both collect tolls on owned assets that require little maintenance. Competition is limited due to high barriers to entry, which include the capital-intensive nature of construction, regulatory hurdles that span multiple jurisdictions, and difficulty obtaining rights of way. Midstream assets are fairly insulated, even during harsh economic times, due to the inelastic nature of energy demand.

Kinder Morgan Energy Partners (NYSE:KMP) owns and operates the largest network of pipelines in the U.S. Its assets include pipelines from the Marcellus shale formation, the fastest-growing natural gas shale formation in the U.S. In 2012 it also purchased key pipelines in the northeast that supply major urban areas in New England, among them Boston, which has been hit exceptionally hard in the last couple years with harsh winter weather.

Kinder Morgan Energy Partners' unitholder distribution increases are becoming a regular occurrence. In January, Kinder Morgan Energy Partners announced a distribution increase of 5%, totaling $1.36 per unit. In March, it announced expectations to meet or exceed already high expectations for 2014. This paved the way for yet another distribution increase of 6% in April. Currently, Kinder Morgan Energy Partners yields slightly more than 7%, and it has a solid track record of reliable and consistently rising distributions spanning decades.

The general partner of Kinder Morgan Energy Partners is Kinder Morgan, which on May 25, 2012 completed the acquisition of my No. 2 selection, El Paso Pipeline Partners (NYSE:EPB).

El Paso Pipeline Partners had a very rough fourth quarter of 2013, resulting in a significant pullback in price. This created a great opportunity for the yield-oriented investor. As prices dropped and distributions remained constant, the yield (in percentage terms) per unit increased.

Currently El Paso Pipeline Partners sports a 7.6% yield, which is significantly above its five-year average of 5.9%. Now plug in a three-year distribution growth rate of 30%, and there could be real potential here.

An improving return on equity, which is among the highest in the industry, coupled with a high gross profit margin could fuel increasing distributions going forward.

But one stock that could present both high yield and significant growth going forward is Williams Partners (NYSE:WPZ), due to its focus on natural gas. Currently Williams Partners delivers 14% of the natural gas consumed in the United States, and it sports a 6.8% yield.

But that 14% delivery rate could move significantly higher if its 70% stake in the Constitution project, a proposed 121-mile interstate gas pipeline designed to connect the Marcellus shale region with desperate northeastern markets by spring 2015, can be completed.

This project is just one example of how capital expenditures are being deployed at a five-year average growth rate of 189%. With management maintaining there is a "robust growth outlook across all markets," it seems Williams Partners is content to keep that capex flowing.

The payoff
Amid an energy revolution in the U.S., pipeline assets will be utilized at increasing rates. Numerous barriers to entry exist, making new pipeline construction prohibitive. Existing assets will grow more valuable as demand for transportation grows. The inelastic nature of the business combined with the structure of an MLP contributes to the stable dividends guaranteed by a predetermined contract. This setup should provide income investors and retirees with peace of mind and consistent returns.

Top dividend stocks for the next decade
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James Catlin owns shares of Kinder Morgan Energy Partners LP. The Motley Fool recommends El Paso Pipeline Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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