Income Flows From Energy Partnerships
Although oil and gas prices have declined, master limited partnerships' generous distributions remain a powerful draw.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
Yield-hungry investors in recent years flocked to master limited partnerships seeking steady income. Now they're feeling the ground shake beneath their feet.
That shaking isn't an oil gusher -- it's MLPs plummeting amid a sharp decline in oil and natural gas prices. But for investors willing to pick through the MLP rubble, says Mark Litzerman, co-head of real asset strategy at Wells Fargo Investment Institute, “there are some very good long-term opportunities here."
MLPs are publicly traded partnerships focused largely on the transportation, storage, exploration and production of oil, natural gas and other natural resources. In a low-yield era, they've become a favorite of income investors because they generally distribute most of their income to investors.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Because many MLPs operate pipelines and earn fees based on the volume of oil and gas they transport, many investors assumed the partnerships wouldn't be hit too hard by a decline in energy prices. But the oil-price plunge upended that theory. West Texas Intermediate crude oil fell from a mid-2014 peak of more than $100 per barrel to less than $40. Spooked by this collapse, many MLP investors dumped shares. The Alerian MLP Index dropped nearly 40%, on a total return basis, from January through early December 2015.
Despite the industry's troubles, MLPs' generous distributions remain a powerful draw for income investors. The Alerian MLP Index yields about 9.3%. And a number of MLPs are well positioned to boost cash distributions in 2016. Among these is Magellan Midstream Partners (symbol MMP, recent price $60, yield 4.9%), which is engaged primarily in transporting and storing refined petroleum products and crude oil. This is a relatively stable, fee-based business, helping to insulate Magellan from commodity price swings. Distributable cash flow -- the cash available for payouts to unit-holders -- was enough to cover 135% of expected cash distributions in 2015, Magellan said in early November. And the partnership is committed to boosting cash distributions by at least 10% in 2016. "I'm very confident these distributions are safe, and they'll continue to grow," says Josh Peters, director of equity-income strategy at Morningstar.
MLPs With Cash Flow
Peters also likes Spectra Energy Partners (SEP, $38, 6.4%), which is focused primarily on the storage and transportation of natural gas and crude oil. The business generates steady fees supported by long-term contracts. The partnership has boosted cash distributions for 32 consecutive quarters, and it expects annual cash distributions to rise roughly 8% this year and next.
Another relatively conservative MLP is Enterprise Products Partners (EPD, $23, 6.7%), whose pipelines transport natural gas, natural gas liquids, crude oil and other products. Management retains a significant chunk of its distributable cash flow so that it doesn't have to load up on debt or issue new equity in order to reinvest in capital projects. Even so, Enterprise has raised its distribution rate for 45 consecutive quarters.
One downside of an MLP is its tax complexity. If you invest directly in MLPs, you'll receive a K-1 partnership tax form instead of the simpler 1099. You'll generally owe taxes on your distributions only when you sell.
You won't have to decipher a K-1 if you invest in MLP-focused funds, which offer broader diversification than a direct MLP investment. Still, they have their own pitfalls. The Alerian MLP exchange-traded fund, for example, is structured as a corporation and therefore must pay corporate taxes. That wrinkle has caused the fund to underperform its benchmark index by 3.25 percentage points annually from its inception through September 30, 2015, according to Morningstar.
By holding any index-tracking product, "you're buying the bad with the good," Litzerman says. "You need to accept the incremental volatility that would go with that."
-
How Much It Costs to Host a Super Bowl Party in 2026Hosting a Super Bowl party in 2026 could cost you. Here's a breakdown of food, drink and entertainment costs — plus ways to save.
-
3 Reasons to Use a 5-Year CD As You Approach RetirementA five-year CD can help you reach other milestones as you approach retirement.
-
Your Adult Kids Are Doing Fine. Is It Time To Spend Some of Their Inheritance?If your kids are successful, do they need an inheritance? Ask yourself these four questions before passing down another dollar.
-
If You'd Put $1,000 Into AMD Stock 20 Years Ago, Here's What You'd Have TodayAdvanced Micro Devices stock is soaring thanks to AI, but as a buy-and-hold bet, it's been a market laggard.
-
If You'd Put $1,000 Into UPS Stock 20 Years Ago, Here's What You'd Have TodayUnited Parcel Service stock has been a massive long-term laggard.
-
If You'd Put $1,000 Into Lowe's Stock 20 Years Ago, Here's What You'd Have TodayLowe's stock has delivered disappointing returns recently, but it's been a great holding for truly patient investors.
-
If You'd Put $1,000 Into 3M Stock 20 Years Ago, Here's What You'd Have TodayMMM stock has been a pit of despair for truly long-term shareholders.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
-
What Fed Rate Cuts Mean For Fixed-Income InvestorsThe Fed's rate-cutting campaign has the fixed-income market set for an encore of Q4 2024.
-
If You Put $1,000 into Qualcomm Stock 20 Years Ago, Here's What You Would Have TodayQualcomm stock has been a big disappointment for truly long-term investors.
-
Another State Bans Capital Gains Taxes: Will More Follow in 2026?Capital Gains A constitutional amendment blocking future taxes on realized and unrealized capital could raise interesting questions for other states.
