Monday, December 15, 2008
The credit freeze has hammered master limited partnerships...
As I explained early last month, master limited partnerships (or MLPs) are one of the best income opportunities of the next few years.
MLPs are a special kind of corporation... Most are in the energy business. Some are coal companies. Some are oil and gas producers. But the majority are pipeline companies – companies that move energy from place to place.
The U.S. government wants to encourage investment in energy infrastructure, so MLPs get a break on corporate taxes. In exchange, they're required to pay a big chunk of profit out to shareholders in the form of dividends.
Because they pay out most of their profits, these businesses have to borrow to grow. As you can imagine, any company that's a heavy borrower these days has seen its share price plummet. But the panic selling in this sector is a huge opportunity for income investors.
Last month, we covered one of the best ways to track the value in MLPs, judging their yields in the context of U.S. government bonds...
Over the past 16 years, MLPs have paid investors between 3% and 4% more than Treasuries. And investors have been happy to sacrifice the safety of Uncle Sam for a few extra dollars in the income column.
But today, MLPs pay an average 12.4%. Thirty-year government bonds pay 2.6%. MLPs have NEVER paid so much more than Treasuries. The "yield gap" is now close to 10%. I'm not the only one who thinks this is a once-in-a-lifetime opportunity...
Over the past three months, MLP insiders have bought about $27 million in shares of their own companies, adding millions more since we took a look in November.
$ in millions
I like the Claymore MLP Opportunity Fund (FMO). It's just as safe as the index, holds big names like Kinder Morgan (KMP) and Energy Transfer (ETP), and pays a higher yield (12.3%) than BSR. It's also trading at a 6% discount. If the discount closes, you could collect nearly 20% in the next year, even assuming MLP stocks stick near their lows.
If you missed a shot at this sector last month, there's still time. You have an unbelievable chance to make double-digit gains in MLPs over the next year, assuming the stocks go nowhere. Don't let it pass you by...
Silver royalty company Silver Wheaton in a stealth bull market... up 51% in December.
Consumer-products giant Kimberly-Clark hits five-year low... down 28% in one year.
Warren Buffett railroad holding Union Pacific hits 52-week low.