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If You're an Income Investor, You Have to See This Chart...By Brian HeyligerMonday, November 3, 2008 A couple years from now, after the sector has climbed 50% and thrown off 20% in income payments, investors will kick themselves for not listening to insiders... for not buying MLPs.
The term MLP is short for "master limited partnership." These corporations have a special page in the IRS tax code that says they can avoid corporate taxes if they pass most of their earnings to investors... which means big cash distributions to MLP shareholders.
Why the special tax treatment? Well, you'll find most MLPs are in the energy business. Some are coal companies. Some are oil and gas producers. But most MLPs are pipeline companies – companies that move energy from place to place. The U.S. government wants to encourage investment in our all-important energy grid.
But investors in these stocks haven't received much encouragement this year...
In June 2007, the Alerian MLP Index was enjoying a big five-year uptrend. But it got ahead of itself. Prices were high relative to the income payments they were throwing off. Back then, it offered an all-time low yield of 5.54%. But the index followed the rest of the market, suffering a 56% decline over the next 16 months.
As with all income investments, when the share price falls, the yield rises. And with the index cut in half, the yield has doubled. Today, the Alerian MLP index is yielding 10.1%. It's among the highest yields I've ever seen on this index... It's around the same yield you could've collected in 1999, just before the index tripled.
But you'll see the most amazing thing about these assets in the chart below. It's the "spread" between the yield you can earn in risk-free government bonds versus the yield you can earn in MLPs. The difference is extraordinary...
MLP Yield Premium over Treasurys
 Right now, government bonds are yielding less than 4%. The MLP index yields two and a half times as much.
This chart is important because U.S. government bonds are the world's standard for income. Income investments compete against each other on a yield basis to attract investor money. So when looking at two different income investments, it's helpful to compare the yield of a potential investment to U.S. bonds. Against this measure, MLPs haven't looked better in more than 16 years.
I think that's why corporate insiders in the MLP business are now frequent buyers of their own shares. They realize these stocks are extremely attractive to investors. Here is a list of MLPs with the largest insider buying the past 90 days:
If you're a yield-seeker, we have a multi-decade opportunity today in MLPs... It's time to buy. You can earn 10% a year in dividends while you wait for the crowd to come in and push up the value of your shares. Don't let the opportunity pass you by.
As I said, a lot of folks will be kicking themselves for not buying high-yielding MLPs right now. Don't be one of them.
Good investing,
Brian
Further Reading:
How to Get 75% Returns from a Dividend Squeeze |
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