The Best MLP Investment We've Ever Seen
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 reasons:
- Cash flows (and hence dividends) are predictable.
- 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 development.
As we have focused on this industry,analysts like Elliott Gue, head of our Top 10Stocks 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 valuations.
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 ( AMJ ) does just that.
This is an exchange-tradednote ( ETN ), not anexchange-traded fund ( ETF ) , 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 ( JPM ) 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 of profits.
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 bite.
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 risk.