by Bryan Perry | March 21, 2014 9:03 am
Master limited partnerships are one of the sweet spots for 2014, when taxes for everyone will be on the rise — even those making under $250,000. That’s right; no one is safe now from being taxed at a higher rate.
I can only hope this special asset class (distributed income from MLPs is 80% to 90% free of federal income tax due to depreciation and depletion allowances) doesn’t become the target of some regulatory movement seeking to destroy the formation of capital for capital-intensive industries like constructing and operating oil and gas pipelines and mining for deep-deposit coal ore.
Within the 31 holdings that make up the two Cash Machine core portfolios, 10 are master limited partnerships. They cover a variety of sectors including coal, shipping, natural gas, venture capital and more.
Seeing as how the future is set to include higher marginal tax brackets for investors of all income levels, the time to embrace the MLP asset class is now. The MLPs on the Cash Machine Buy List are part of “the world is only getting bigger” theme that stands to benefit from such a statement.
It’s the right asset class at the right time, and to get you started, I’ll give you my top MLP right now, along with three more that look like attractive candidates I might recommend for the Cash Machine portfolio in the future, and also a fund playing on MLPs.
New Source Energy Partners, LP (NSLP) is among the newest in the space and went public less than a year ago. The partnership engages in the acquisition and development of oil and natural gas properties among roughly 89,000 gross acres in the Golden Lane field in east-central Oklahoma and 127 gross proved undeveloped drilling locations. The estimated proved reserves on its properties consist of 14.2 million barrels of oil, and natural gas reserve data are due out with the next set of quarterly financials.
This is a pretty straightforward story. The partnership is a subsidiary of a larger parent company, New Source Energy Corporation, that holds about 35% of the units, and Goldman Sachs (GS) is the second-largest shareholder, with just under 5% of the outstanding units. With a market cap of only $255 million, this is a relatively small enterprise, but one that is growing at nice clip and offers just about the double-digit income I target at a 9.9% yield.
Because this is such a new outfit with a limited track record, I’ve placed it in my Aggressive High-Yield Portfolio as a strong buy at or under $23.50, so position accordingly. If you do purchase shares, do so using limit orders, as the stock has a smaller float; it trades about 50,000 shares per day — far fewer than do the big-cap names that dominate the sector.
NSLP is a name you can feel good about acting on today. Now, here are a few more MLPs (or funds with direct MLP exposure) on my watch list:
Another highly attractive energy MLP is Capital Product Partners, LP (CPLP). Formed in 2007, Capital Product Partners is an international diversified shipping company. It’s involved in seaborne transportation of oil, refined oil products and chemicals as well as dry cargo and containerized goods, and it offers medium- to long-term, fixed-rate time and bareboat charters.
CPLP can be a bit more volatile, so it’s not an appropriate place for my steady, income strategy in Cash Machine — at this time.
Compressco Partners, LP (GSJK) is basically a provider of services to large drillers, and all kinds of fittings and parts and manpower services to the oil services business, the oil fields. Its production enhancement services are used in both conventional wellhead compression applications and unconventional compression applications
The stock has a good price history, a good earnings history, and a good dividend paying history with a nearly 7% current yield but I’m mindful of how the outcome of the Ukraine dispute could affect names like GSJK and the overall oil and gas industry.
Rentech Nitrogen Partners, LP (RNF) is a name we’ve invested in successfully in the past: In May 2013, we made an even 50% on the fertilizer play.
The firm is a leading fertilizer business based in East Dubuque, Ill., situated right in the midst of what is called the Mid Corn Belt of America, adjacent to Wisconsin and Iowa, the largest market in the United States for direct application of nitrogen fertilizer products. The company sells virtually all of its production to within a 200-mile radius of where it’s manufactured. Because its location is among the highest producing states, it allows the company to sell nitrogen products into higher-priced agricultural markets, realizing higher average net sales prices per ton of ammonia than other publicly traded competitors.
I liked RNF for a long-term play, but after several dividend decreases, I opted to cash in our profits on the name to remove some of the risk from our portfolio. But the fertilizer story is still a strong one, so it may be suitable for dividend investors who can tolerate more speculation. Grain prices are up big as drought conditions emerge and the Ukraine situation unfolds. Fertilizer plays like RNF remain a consideration, but I’m not ready to act yet.
Kayne Anderson Energy Total Return Fund (KYE) isn’t actually an MLP itself, but rather a closed-end fund that invests in them.
Shares of KYE bottomed out in the mid-$25 range, but with the rest of the big-cap MLP sector, it actually rallied back to the current downtrend line.
As a collection of the leading energy-related MLPs — some of which are underperforming — the shares need to find support before I’d recommend buying them.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.
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