For investors looking to cash in on America's energy
renaissance, there is one special class of investments. Over the
last 10 years, a select group of stocks has beaten the S&P
500 index by a factor of 2-to-1.
These investments are known as
Master Limited Partnerships
or MLPs. Most MLPs are in the business of collecting,
processing, refining and transporting oil and
. Many of my favorites are in the business of operating vast
networks of pipelines that are used to transport America's
growing energy production.
MLPs and the Tax Reform Act of 1986
What makes MLPs special is that they're legally able to avoid
paying income taxes. That's because in 1986 President Ronald
Reagan signed a tax reform law that encouraged investment in
domestic energy. By allowing a select group of energy
infrastructure companies to operate tax-free, he aimed to
encourage much-needed capital investment.
Thanks to technological developments including fracking,
America is well on its way to achieving energy independence by
2030. And in just four years, the U.S. could eclipse Saudi
Arabia as the world's top oil-producing country. Even President
Reagan would be impressed by the massive growth that his tax
America's energy boom stretches from the Marcellus Shale in
upstate New York to the Eagle Ford Shale in Texas. With
expected to grow by 50% over the next six years, there will
continue to be many profit opportunities.
MLP performance - measured by the
JPMorgan Alerian MLP Index (
S&P 500 (
by about 4% last year. But with a strong long-term track record,
select MLPs could continue to deliver superior returns in
My favorite MLPs share three common traits. First, they are
investing in their business and growing. Second, they are
increasing their cash flow and dividend payments to shareholders.
And third, their cash flow is more than enough to cover the
I'll share two MLP investment ideas that meet these criteria.
In fact, I recently bought both stocks in my personal investment
My first MLP recommendation is
MarkWest Energy Partners (
. The company was a first mover in the Marcellus Shale, and
is also active in the rapidly growing Utica formation.
MarkWest pays a 4.7% dividend yield and increased its dividend
payments in each of the last four years. Despite a slight
earnings miss earlier this week, MarkWest has plenty of cash flow
to pay higher dividends in 2014. I think it's possible for the
dividend to grow 10% - 13% this year.
My second MLP recommendation is
Plains All American Pipeline (
. With more than 17,400 miles of oil and gas pipelines and a $20
billion market cap, Plains All American is a major player.
Similar to MarkWest, Plains All American Pipeline pays a 4.6%
yield. Based on the company's growth prospects, it looks as
though Plains All American will grow its dividend by about 10% in
One of the best reasons to own these
is because they're raising their dividends. Over time, the share
price of a dividend stock tends to move in tandem with the
dividend. And this means that a company that consistently raises
its dividend by 10% should see its share price rise by about 10%
Both MarkWest and Plains All American Pipeline are likely to
grow their dividends by 10% or more in 2014. Assuming that the
share price follows suit, I think it's possible that both of
these stocks will deliver 15% - 20% total returns in the next
What is your favorite MLP? Do you own shares of MarkWest or
Plains All American? I would love to hear from you.
Please send me an email at
I'll be writing more about MLPs in the coming weeks. If
you send me the names of your MLPs, I'll be evaluating additional
stocks in an upcoming edition of
Income & Prosperity
Income From Pipelines: the Safest Energy
Most investors hope to "catch a flier" on small, risky
exploration companies who usually don't have a drop of oil in
their wells. But in our experience, people don't build pipelines
until they know when and how much oil they'll pump. Which makes
pipeline stocks the least risky investments in the entire energy
sector. No pipes - no oil.
Click here to read my full write-up on two
American pipeline stocks paying big (and growing) dividends