MLPs – strong yields and a promising outlook

Master Limited Partnerships not only provide investors with compelling yields, but also have a promising outlook going forward.

Current yield environment
The income potential is particularly notable in the current yield environment, as both central and private banks have been snapping up bonds over the last several years, according to Bloomberg.

Central banks have been purchasing debt-based financial instruments to increase the money supply, while many financial institutions have been buying these securities to bolster their revenue at a time when the lending markets discourage them from taking on additional credit risk, the media outlet reported.

Banks have substantial cash they can use, and while they can turn to lending, it is frequently easier for them to simply hold Treasuries, one analyst told the news source. Amid this situation, financial institutions have helped put downward pressure on the yields of these government securities.

MLPs draw market attention
At a time when market factors are helping to push these regular payments lower, MLPs havegenerated significant attention from investors looking to energy stocks, contributor group Advisor Intelligence wrote in a Forbes article. Market participants can choose from several different categories of energy MLPs, the contributing group noted. These types include:

• Upstream MLPs: These entities mostly take part in the exploration, production, recovery and development of natural gas, crude oil and natural gas liquids.
• Downstream MLPs: Investment vehicles of this type focus on distributing fuels to end consumers, which include residential, agricultural and industrial entities.
• Midstream MLPs: Most MLPs in the market fall under this category, which are involved in gathering, storing and transporting oils and gases. These partnerships are less sensitive to fluctuations in underlying energy types than upstream and downstream MLPs, and generate revenue by storing and transporting fuels.

In addition to providing investors with a diverse selection of fund types they can use, MLPs are recognized as pass-through entities stemming from the fact that they pay out at least 90 percent of their income from “qualified sources.” As a result, they are not required to pay corporate income tax at either the state or federal levels.

Strong income opportunities
MLPs are also obligated to make distributions to their unit holders every quarter. Combining the two aforementioned factors can provide a strong supply of tax-advantaged income.

To illustrate this potential benefit, The Alerian MLP index, a widely used gauge of mid and large-cap energy MLPs, yielded 6.16 percent on Jan. 23, according to The Wall Street Journal. Alternatively, 10-year government bonds paid out less than 2 percent at the time.

In addition, the index has held up relatively well in spite of the sharp drop in energy prices, falling 14 percent in the six months preceding the time of report, the media outlet reported. One potential downside risk is falling energy demand, and financial expert Simon Lack told the news source that lower prices will stimulate demand, if anything.

While skyrocketing supply has caused energy prices to dwindle in recent months, many MLPs have benefited from this strong increase by transporting the raw materials created.

Promising outlook
Amid this situation, Advisor Intelligence emphasized that its outlook for the growth potential of these partnerships is optimistic. The contributor group noted that technological advances have helped support surging production, and that this development has provided tailwinds for the commodities associated with many MLPs.

In addition, Advisor Intelligence predicted the U.S. will eventually become a net exporter of both oil and natural gas. For this to shift to occur, the U.S. would need to invest heavily into upgrading existing infrastructure. However, such expenditure would probably provide additional benefits for MLPs, the contributor group asserted.

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