With U.S. 10-year Treasuries yielding less than 2%, income-hungry investors are on the prowl for high-yielding investments. One asset class many investors are turning toward is master limited partnerships, or MLPs. For risk-averse investors seeking a steady and reliable stream of income, midstream MLPs should be one of the first places to look.
A primer on MLPs
There's no two ways about it. Over the past decade, master limited partnerships have been one of the best investments you could have made. MLPs have returned close to 16% annualized in the past ten years, compared to just 4%-5% for the Dow and the S&P500.
The allure of MLPs has a lot to do with their organizational structure; they're pass-through entities that are exempt from corporate income taxes. Hence, they are required to pay out the bulk of their income to shareholders -- or unitholders as they're called in MLP-speak -- in the form of quarterly distributions. With the average MLP yielding around 6%, it's clear why the asset class has attracted so much attention in recent years.
Most MLPs operate within the energy sector. However, there are also a few MLPs outside the energy space that may well be worth consideration. For instance, Terra Nitrogen
While some of our analysts have made convincing cases for investing in these non-energy MLPs, I still prefer MLPs within the energy space. And while some energy MLPs, such as those engaged in upstream operations, do have meaningful exposure to commodity prices, there are more defensive ways of playing the sector -- namely through the midstream operators.
The bullish case for midstream MLPs
The midstream industry sits comfortably between the upstream segment (the explorers and producers) and the downstream segment (the sellers and distributors). They're the guys involved in the transportation and storage of oil, natural gas, natural gas liquids (NGLs), as well as gasoline and other refined products.
One of the most attractive features of the midstream MLPs is their toll-booth-like business model. They simply act like toll collectors, charging operators fees for letting them use their pipelines. Roughly 65% of the MLP sector's revenue is derived from fees, many of which are tied to government-regulated rates. As such, they have highly monopolistic characteristics; their services are absolutely essential to a wide array of businesses, which makes them that much more attractive.
With the tremendous discoveries of shale deposits throughout North America and the commercial use of hydraulic fracturing and horizontal drilling to unlock their potential, it's no surprise that demand for midstream services has grown rapidly. In a nutshell, one of America's biggest problems with regard to our energy landscape is that we've been producing oil and natural gas at a breakneck clip, but there just aren't enough pipelines to transport all of those resources to where they're needed.
According to a recent study by the Interstate Natural Gas Association of America, roughly $10 billion per year in midstream infrastructure spending in required to meet growing demand over the next 25 years. This is where the midstream MLPs come in to play. Three names in particular are worth strongly considering.
3 companies to consider
I prefer the larger, well-capitalized, midstream outfits. One name I especially like is Enterprise Products Partners
Another MLP investors should consider is Plains All American Pipeline
Lastly, be sure to check out Linn Energy
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