Despite the Federal Reserve’s promise not to taper, it will eventually stop its bond-buying program and raise interest rates. And this prospect of higher rates has sent many high-yielding and income-oriented investments down the tubes in the past few months.
That has included my favorite energy income stomping ground: master limited partnerships, or MLPs.
However, investors shouldn’t abandon their MLP holdings just yet. In fact, they might want to add to their exposures.
According to a new report from research group Ned Davis, several of these pipeline and gathering firms are actually great bets during a period of rising interest rates. The reason is their history of aggressive distribution growth and high distribution coverage ratios — essentially, the cash that an MLP has to cover their current payout as well as future ones. Firms with higher coverage ratios have historically been able to provide yield growth in excess of rising rates. And considering that most MLP yields are already way higher than Treasury payouts, investors can reap major income from holding these partnerships.
In fact, Ned Davis estimates that “MLPs with strong distribution growth over the next 12 months should outperform other MLPs by 15% per year,” according to Barron’s.
So who exactly makes the cut? Here are Ned Davis’ top five ideas — yielding up to 7% — for investors looking for MLPs to fight off rising interest rates.