One of the most accomplished investors in recent history is Bill Gross. Known as the "bond king," Gross made a name for himself as the founder of Pacific Investment Management Company (PIMCO) in the 1970s.
While he is no longer part of PIMCO, Gross is still an active investor. Recently, he posted on social media that he sees Western Midstream Partners (WES -2.00%) as the "best of the bunch" when it comes to pipeline master limited partnerships (MLPs).
With its juicy dividend yield of 10%, should you follow Gross' lead? Let's dig into why adding some exposure to the energy sector might be a good idea, and analyze whether Western Midstream is a good option for you.
Energy is off to a hot start this year
In general, stocks have gotten off to a great start in 2024. Themes in artificial intelligence (AI) and medical breakthroughs in weight loss treatments have fueled the technology and healthcare sectors this year. These gains have contributed greatly to the S&P 500's year-to-date return of 7%.
But did you know that the energy sector has performed on-par with tech? Industrials, basic materials, and utilities have all performed strongly so far this year, and I think there could be some overlooked opportunities.
Image source: Getty Images.
Why are MLPs a good choice for energy investors?
It's important for investors to understand that the energy sector is broad. Moreover, some segments within the industry are generally more volatile and susceptible to macroeconomic factors, including inflation and interest rates.
MLPs are a unique breed, though. As the name implies, these businesses are structured as limited partnerships (LPs). They are required to pass through profits and losses to partners (or shareholders). The investors then pay their portion of the company's profits at their individual tax rate.
This is a big selling point for investors, as they can deduct certain items to offset capital gains taxes. MLPs also pay out generous distributions to their investors -- similar to those of a dividend.
Another reason why MLPs are different than other energy businesses is that they tend to enter into long-term, fee-based contracts. For example, per Western Midstream's filings, 95% of the company's natural gas operation and 100% of its liquids contracts (crude oil and produced-water) were fee-based revenue in 2023. This dynamic provides Western Midstream with more insulation from volatility in commodity pricing, as well as broader themes in the economy or even geopolitical factors that can affect other areas of the energy sector.
Something to think about
Investing in MLPs provides exposure to the high-growth energy sector, but it isn't attached with the same risk profile as other opportunities. Although the company experienced some turbulence during the COVID-19 pandemic in 2020, Western Midstream has demonstrated some encouraging resilience over the last few years.
Western Midstream's fee-based revenue should provide some degree of comfort around its long-term prospects. Moreover, the company's strong free cash flow has helped fuel consistent distribution raised -- a nice kicker for passive income investors.
I think there is something bigger at play here. Remember, Gross is a bond investor at heart. Bonds are some of the most predictable, steady sources of income available to investors -- therefore, they are generally perceived as less risky than stocks or other asset classes. In a way, I think Gross sees Western Midstream as akin to a bond.
The chart below illustrates the forward price-to-earnings (P/E) multiple for Western Midstream and some of its peers. Western Midstream's forward P/E of 10.3 is lower than other MLPs, which could represent an opportunity to buy the stock at a slight discount.
WES PE Ratio (Forward) data by YCharts
While there are many other choices in the stock market, opportunities in technology, healthcare, and other sectors can carry significant volatility and unpredictability. For investors looking for a healthy combination of growth, dividend income, and predictability, Western Midstream provides the best of all worlds.
