Barron’s January 2017 headline regarding their best income ideas reads, “European dividend stocks, including Nestle and Royal Dutch, look like the best bets for the year ahead, with yields up to 7%. Electric utilities and U.S. dividend stocks are also attractive. But steer clear of Treasuries, telecom, and MLPs”. [i]
This is the kind of headline that reflects typical human behavioral investing. Many studies have shown that investors tend to invest when recent performance has been good and pull out when recent performance has been bad. Investors also reflect on the most recent market events when forecasting the future. For example, who was predicting $27 oil when it was trading at $100? Certainly, no one that I am aware of.
To be sure, MLPs have suffered poor performance from mid-2014 through February 2016. However, even after this period, MLPs have averaged 13.7% average total return from 1998 through the end of 2016. That is higher than REITs, utilities, the S&P, bonds, and the NASDAQ.
Barron’s dismissed MLPs because the growth in the payouts may “slow to five percent or less, with some growing their distribution only two percent.” However, the magazine did say the current payouts were around seven percent, higher than any of the other recommendations it was promoting.
At DeWitt Capital we would say it differently: First of all, what is wrong with five percent? MLPs have come out of the downturn mostly stronger, with healthier balance sheets and a new focus on financial discipline. If growing at five percent is partially a function of more discipline and stability, then we do not see much to complain about. Furthermore, many MLPs will still be growing their distributions well above five percent. Some will be growing as much as twenty percent. Of all the asset classes we reviewed; MLPs offer the highest yield (which is mostly tax deferred). MLP prices suffered due to an unprecedented correlation with oil during the downturn which created an equally unprecedented value proposition for the sector.
MLPs beat the S&P every year from 2000 through 2011. It has outperformed every other sector since 1998. A return to the mean would provide investors a solid income and the real potential for significant gains over the next few years.
[i] Source: “This Weekend’s Barron’s: Best Income Ideas of 2017 …” Yahoo! Finance. N.p., n.d. Web. 09 Jan. 2017 <https://finance.yahoo.com/m/16880e98-4e53-387d-a138-41e53d2da457/ss_this-weekend>.