Looking to increase investment income? Master Limited Partnerships or MLPs, are energy sector investments that pay attractive distributions to their unit holders and have favorable tax treatment. You may find many MLP and MLP funds pay yields above 7%.
But before you break open the piggy bank or mortgage the house to own a piece of this asset class, you should know how they work. MLPs are usually in the energy sector. When oil or natural gas needs to be transported, it is usually though a pipeline created by an MLP. These pipelines run between the oil or natural gas basin and the refinery or cracker. The MLP charges the energy producer a toll to pump their goods through the pipeline. The profits from those fees are divided up between the unit holders and usually paid out quarterly.
A passive approach to partnerships
An MLP has two classes of partners, the General Partner and the Limited Partner. The General Partner forms the MLP and manages it. The Limited Partners, people like you and I, provide the capital for the organization. Compared to a corporation, the General Partner is like the CEO and executive management team, the units like shares, the unit owners like shareholders and the distributions like dividends.
This means you won’t get stuck with a bill for your share of equipment replacement like partners in other types of arrangements. (Read more about oil well investing here.) Plus, an MLP trades on an exchange like a stock giving you greater liquidity than a private placement partnership.
Here are a few well established MLPs that I find attractive. Yields cited here are as of the close of business on Mar 15, 2019.
Energy Transfer, LP (ET) 8.94%. ET is the result of the Oct 19, 2018 $25B merger of Energy Transfer Partners and Energy Transfer Equity. ETP was established in 1995 and has grown to be one of the largest and most diversified with 71,000 miles of pipeline.
EnLink Midstream (ENLC) 14.65%. ENLC is a leading, integrated midstream company with a diverse geographic footprint.
Buckeye Partners (BPL) 7.38%. BPL was upgraded recently to buy from neutral at UBS.
Closed End Funds
There are also many closed end funds that specialize in Master Limited Partnerships. Closed end funds trade on an exchange like stocks. They hold many MLP’s in one investment so your risk is spread out.
Nuveen Energy Total Return (JMF) 12.03%. Nuveen was founded in 1898 and has ever since enjoyed an excellent reputation. This fund has $462 million invested in it and the management team has been in place on this fund since 2011.
First Trust Energy and Income (FEI) 10.67%. First Trust Portfolios is a well-known entity in the investment world. This fund has $609 million of assets under management. Two of the three fund managers have been on this job since 2012.
Duff & Phelps Select MLP Fund (DSE) 12.99%. This fund cut its dividend last quarter. That leads me to believe that future cuts won’t come anytime soon. The two fund managers have been managing the fund’s assets, currently $155 million, since 2014.
Kayne Anderson Midstream Fund (KMF) 8.56%. This fund is the result of a merger between KA Midstream and KA Total Return on Aug 6, 2018. As of the close on September 3, the fund trades at a 13.74% discount to net asset value (NAV). Buyers of this fund pay a discount to the value of the underlying securities. While the preceding money managers have a broad spectrum of funds, KA Fund Advisors is the largest institutional investor in the MLP asset class. They manage $16 billion in their energy funds and their team has deep involvement throughout the energy sector.
These seven energy plays offer above average income potential in the energy asset class. Of course, do your homework carefully and diversify your investments.
Read more about my background here.