MLPs for income. MLPs should be in your portfolio for income. In a low rate environment, investors have been hamstrung for the past several years looking for income. In their 1st qtr. Investment Recap, JP Morgan offers the following table of average yield by asset class.
There are tax implications to owning MLPs, such as the need to file K-1s and the debate concerning investing with tax-deferred accounts. It is important that investors review these issues with their tax preparer. For DIY tax payers, tax filing software includes easy to complete forms for MLP income.
Many investors are concerned about buying stocks in the face of rising interest rates. JP Morgan also addressed this issue with a chart of the 2-yr rolling correlations between weekly stock returns and interest rate movements going back to 1963. Along the bottom is the yield on 10-yr Treasuries and the left side number is the correlation coefficient, with the horizontal line in the middle at 0. Above the line indicates a positive correlation, i.e. they move together. Below the line is a negative correlation, i.e. stocks decline and rates increase.
When 10-yr Treasury yields are below 5.0% (red line), rising rates have historically been associated with rising stock prices. The break point is at the 5.0% yield level where stock returns turn negative as rates continue to increase.
Many fixed income forecasters peg 10-yr Treasury yield in the 3.0% to 3.5% range at year end. While this is creeping up from the current 2.49% yield, it is still below the 5% threshold suggested by JPM.
With an anticipated decline in stock price returns, income will become a higher portion of total investment returns, hence a focus on dividend and distribution yield.
Midstream MLPs have been making a comeback after being decimated with the decline in oil and gas prices since 2014. For many firms, the darkest days should be behind them as oil settles into a $50 to $60 range over the next few years.
Investors who are seeking long-term income should review the following four MLPs:
o Spectra Energy Partners – SEP – 5.8% yield
o Enterprise Products Partners – EPD – 5.7% yield
o Dorchester Minerals – DMLP – 5.4% yield
o Dominion Midstream – DM – 3.25% yield
More speculative firms worthy of further research include:
o Summit Midstream – SMLP – 8.8% yield
o Enable Midstream – ENBL – 7.7% yield
o Phillips 66 Partners – PSXP – 3.7% yield
As the energy midstream markets continue to improve, investors in these MLPs will see distribution increases, improving their yield on cost. For example, EPD continues to raise its quarterly distribution. Since the partnership’s IPO in 1998, EPD’s latest hike represents the 59th distribution increase and the 50th consecutive quarterly increase. As more projects come online, Dominion Midstream management has set a goal of raising its distribution by 20% a year over the next few years.
Thanks for reading. This article first appeared in the Feb 2017 issue of Guiding Mast Investments. George Fisher