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.
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.
Master Limited Partnerships
Here are a few well established MLPs that I find attractive. Yields cited here are as of the close of business on December 29, 2020.
Energy Transfer, LP (ET) 17.13% – ET is the result of the Oct 19, 2018 $25B mergers 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
The consensus recommendation according to Reuters (on Dec. 20) is Outperform, the second highest rating available at that research firm. Credit Suisse Research has kept ET at Outperform, which is its highest rating, since October 2018.
EnLink Midstream (ENLC) 9.92% – ENLC is a leading, integrated midstream company with a diverse geographic footprint. On December 29 CFRA, part of S&P Global Market Intelligence, issued a Buy recommendation based on their quantitative analysis. Quantitative has to do with recent price patterns and is different than qualitative, which is an analysis of the quality of a company.
Plains All-American (PAA) 8.43% – Since its inception in 1981, this MLP has grown to be one of the largest with assets across North America and still growing. On December 25 Reuters Research issued a consensus report of Outperform for this MLP. The following day CFRA, the Center for Financial Research and Analysis, issued a Buy recommendation.
Closed End Funds
There are also many closed end funds that specialize in Master Limited Partnerships. Closed end funds are like the more widely known mutual funds but offer only a limited amount of shares. New offerings are said to be closed. Their shares trade on an exchange like stocks at a current market price. That price may be more or less than the net asset value of the underlying companies. They hold many MLP’s in one investment so your risk is spread out.
First Trust Energy and Income (FEI) 10.47% – First Trust Portfolios is a well-known entity in the investment world. This fund has $320 million of assets under management. Its distribution to investors is paid out monthly. Two of the three fund managers have been on this job since 2012.
ClearBridge MLP & Midstream Fund (CEM) 11.34% – This closed end fund is managed by Franklin Advisors, Inc., part of the well respected Franklin/Templeton Investments. This fund is valued at $281 million. It has a very low turnover rate of 9%. It is trading at a 19% discount on December 30, meaning that an investor could have bought $20.87 of assets for $16.75 on that day.
Kayne Anderson Midstream Fund (KMF) 6.45% – This is the only security included here with a yield below 7%. But, it is such a solid fund, it is included here for your information. Morningstar gives it an above average historical return rating with average risk rating. As of the close on December 30, the fund trades at a 13.74% discount to net asset value (NAV).
The fund is the result of a merger between KA Midstream and KA Total Return on Aug 6, 2018. 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.
ETFs & ETNs
The popularity of ETFs (Exchange Traded Funds) and ETNs (Exchange Traded Notes) has moved into the MLP space, too. An ETF and ETN are both baskets of underlying securities that are assembled to emulate a popular investment index.
iPath S&P MLP (IMLP) 13.77% – This ETN’s sponsor describes the investment like this: “The iPath® S&P MLP ETN (the “ETNs”) is designed to provide exposure to the Volume-Weighting Average Price (“VWAP”) level of the S&P MLP Index (the “Index”). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party.”
In simple terms, the security is intended to track the S&P MLP Index. An index is designed to represent an average of an investment sector. The index is updated by its committee, usually, annually to emulate accurate representation. The ETN managers then follow those updates.
These seven energy plays offer above average income potential in the energy asset class. Of course, do your homework carefully and diversify your investments.