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Master Limited Partnerships for Income

Earlier this year, a reader named Pat wrote to me: “I would enjoy your recommendations for various master limited partnerships as we are all looking for higher yielding investment vehicles in this low interest rate environment.” Today is Pat’s day, as I have some great MLP ideas from the latest issue...

Earlier this year, a reader named Pat wrote to me: “I would enjoy your recommendations for various master limited partnerships as we are all looking for higher yielding investment vehicles in this low interest rate environment.”

Today is Pat’s day, as I have some great MLP ideas from the latest issue of the Dividend Digest.

Master Limited Partnerships, or MLPs, are a type of company designed specifically to pass most of their income along to investors. If you’re unfamiliar with MLPs, or have any questions about their tax treatment (it’s complicated) we have some great resources for you on our website.

MLPs have benefited from the low interest rates of the last five years, which provided the capital-intensive businesses with easy access to low-cost capital. In addition, low interest rates drove yield-hungry investors like Pat to consider holding a broader range of investments for income, including MLPs.

However, over the past six months, fears of rising interest rates have caused investors to dump many MLPs. Investors are afraid that higher interest rates will both make MLPs less popular investments (by creating other high-yield options) and make it harder for capital-intensive MLPs to make money.

Personally, I don’t think the first concern is well founded. I wrote here recently about why rising interest rates will actually make bond funds and existing bonds less attractive. And higher cost of capital will also affect many other high-income investments (like REITs).

In short, I think it’s still safe to invest in MLPs today. However, I recommend focusing on MLPs with the best growth prospects, either through drop-down acquisitions, increasing volume or improved prices. Here are two of the best growth-and-income MLPs from the latest Dividend Digest.


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First, from Forbes/Lehmann Income Securities Investor:

“Master Limited Partnerships are the most attractive tax-deferred income securities in the market today. Getting one that is in a high growth business, pays 6.99% and has increasing quarterly dividends every quarter for the last 14 quarters is a compelling buy. Williams Partners LP (WPZ) is such a buy. Their pipeline operations are independent from the price of the gas and oil that flows through them, and their competition, railroads, can never compete with them on price. This MLP belongs in every taxable account.

“Williams Partners is a diversified master limited partnership with its gathering, treating, storage, natural gas liquid (NGL) fractionation and processing midstream assets. ... For their second quarter of 2013, Williams Partners L.P. reported revenue of $1.73 billion and net income of $256 million. Last year for the same period, they posted revenue of $1.82 billion and net income of $243 million. These units (shares) are best suited for medium-risk portfolios. Buy at or below $52.00.”—Jack Colombo, Forbes/Lehmann Income Securities Investor, September 2013

The second fast-growing MLP comes from Top Stock Insights Editor Ian Wyatt. Here’s part of his recommendation:

“With 6,300 miles of natural gas pipelines in the U.S., Access Midstream Partners (ACMP) is big player. Its pipelines connect more than 7,900 wells to the pipeline grid. With total collections of roughly 3.5 billion cubic feet of natural gas per day, Access Midstream is the largest midstream gas company in the U.S. And its biggest client is Chesapeake Energy—the biggest U.S. natural gas company. ... One of the exciting developments at Access Midstream is the launch of a gas processing facility in the up-and-coming Utica formation. This exciting formation is located in eastern Ohio, adjacent to the very well known Marcellus Shale formation.

“Access Midstream is launching three additional processing plants every three to six months in an effort to capture market share in this rapidly developing region. That type of growth in this area could add $100 in EBITDA to the company’s bottom line.

“In addition to solid operating results, the company has a sound balance sheet. Following a recent $400 million debt offering in August, Access Midstream has nearly $2 billion of liquidity on its balance sheet. That means the company has adequate cash to fund a considerable portion of its 2003–2015 capital investment plan with limited additions of debt or equity.

“Today Access Midstream Partners is a rapidly growing MLP. Since going public in late 2010, the company’s quarterly adjusted EBITDA—a measure of cash earnings—has grown from $73 million to $207 million. That translates into an astounding annual growth rate of 52%.

“Meanwhile, the company’s quarterly distribution has grown from $0.34 to $0.49 per unit. That translates into a compound annual growth rate of 15%. There is evidence that Access Midstream will be able to continue growing its distributions in the coming quarters.”—Ian Wyatt, Top Stock Insights

If you want to read the rest of Wyatt’s recommendation, as well as recommendations of three other high-yielding MLPs, just click here to learn more about taking a trial subscription to the Dividend Digest.

Wishing you success in your investing and beyond,

Chloe Lutts Jensen

Editor of Investment of the Week

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.