In recent years, we've written extensively about masterlimited
partnerships (MLPs) that are building out the nation's network of
oil and gas pipelines.
Theinvestment theme has been a winner for two simple
- Cash flows (and hence dividends) are
- A steady industry expansion has led to solid growth for
many of the top players.
With this kind of long-term predictability, it's no wonder
MLPs are some of our favorite "Forever"investments . (Coined by
StreetAuthority co-founder Paul Tracy, "Forever" investments are
ones you can buy, hold and simply "forget about" while they
steadily rise over the longterm .)
One of the reasons we consider MLPs "Forever" investments is
because, unlike some booms thatfade after a few years, this boom
has legs. Anotherwave of pipeline construction is underway to
help carrylandlocked energy to coastal refineries. And in
comingquarters , there's a solid chance the Obama
administrationwill give a formal green light to gas export
facilities, which could trigger a whole new wave of pipeline
As we have focused on this industry,analysts like Elliott Gue,
head of our
newsletter, as well as myself, have continually handicapped which
companies have the strongest yields, which companies have the
most robust growth prospects, and which stocks sport the lowest
That analysis has uncovered some great trading opportunities,
but anyone who has followed our lead has come across a persistent
problem: These MLPs, thanks to their unique corporate structure,
can create a headache at tax time. Each MLPissues a K-1 tax form
atyear end, and if you own a half-dozen of them, then that's alot
of paperwork to sort out.
Yet there's a simpler way. Instead of constantly searching for
the most attractive MLPs, why not keep it simple and own an
investment that does all the tax work for you? The
JPMorgan Alerian MLPIndex ETN (
does just that.
This is an exchange-tradednote (
), not anexchange-traded fund (
) , but the distinction doesn't really matter (unless the
ETNissuer defaults on that note, which has never happened, as far
as we know). Yet it's the ETN tax structure that saves you
headaches during tax time.
JPMorgan Chase (
actually owns the stocks in this ETN, and you simply invest in
JPMorgan'sdebt instrument. At tax time, there's no K-1 to worry
about. Moreover, if this ETN were structured as anETF , it would
generate corporatetaxes , which would take a roughly 5% bite out
Yet the greatest appeal of this ETN is its rock-steady
performance. Year after year, it rises in value as more pipelines
get built and higher industry dividends are paid out. In fact,
this note has risen an average of 20% over the past three years
while generating below-average risk. That's why Morningstar gives
this note five stars.
Indeed, we've discovered over time that these MLPs not only
deliver solid share pricegains , but also deliver more robust
yields when compared with other yield-focusedasset classes.
According to Bloomberg, the averagebond ETF yields 2.16%, the
average utilities ETF yields 3.52%, and the typical REIT ETF
sports a 3.55%yield . In contrast, the Alerian MLP ETN's yield
currently exceeds 4.5%.
To be sure, the note has a few drawbacks, starting with a
0.85%expense ratio . Thankfully, the 20% annualized gains have
made that expenseload bearable, but if annual returns are smaller
in the future, then those expenses will take a seemingly deeper
Also, like all yield plays,shares may suffer if interest rates
keep rising and investors pivot back tofixed-income investments.
Indeed, this ETN is off nearly 7% in the past month as interest
rates have risen. Yet a still-slow U.S.economy is likely to cap
further interest rate increases in the near term.
Risks to Consider:
You can probably find MLPs with greater yields if you are
willing to dig more deeply, but understand that higher yields
signal less safety.
Action to Take -->
The Alerian MLP ETN offers a compelling combination of share
priceappreciation , rock-solid yields and very low
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