Buy MLPs After Insiders for Big Profits

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As investors have found it increasingly difficult to find income-producing investments, master limited partnerships (MLPs) have come into vogue.

dividend stocksThese investments provide high yields, but I am often concerned that investors are not always sure what they’re buying with these vehicles. Most of them own energy assets such as pipelines and storage facilities to provide the cash flows needed to throw off sufficient income to attract investor attention.

The taxes can be a little complicated for investors used to straightforward tax returns involving only dividends and capital gains, but they do offer an alternative to traditional fixed income investments and have become very popular the last few years.

That popularity among income seekers is the source of the greatest risk to MLP investors. MLP owners will tolerate earnings fluctuations, commodity price swings and market volatility without much complaint. What they will not tolerate is dividend reductions.

Take a look at what happened to MLPs like Boardwalk Pipeline Partners (BWP) and Rhino Resources Partners (RNO) this year when they had to cut the dividend. Income-oriented investors immediately dumped the shares, driving the prices down more than 50% in both cases. With oil prices trending lower, there is a growing possibility that we will see more dividend cuts in the next year so the risk in this sector could be growing.

However, there’s a nearly foolproof way for MLP investors to avoid the dividend cut carnage: Track the buying of insider buying or selling in the MLP universe carefully.

Insiders are in the best position to know about the cash flows and asset values of their business. If they even suspect a significant dividend reduction is in the future they will not open their checkbook to buy shares in the open market. They know how their cash flows will change relative to commodity prices and are all too aware what will happen to the share price if they cut the payout.

Take a look at Natural Resource Partners (NRP) as an example of using insider buying as a sign of confidence. Like Rhino Resources, the company owns coal producing properties in the United States and provide cash flow from coal sales. NRP has been diversifying the company to provide better cash flows by buying up assets in the construction aggregates business and the oil and gas industry.

Insiders appear to be comfortable with the outlook of the businesses and are not too concerned about a dividend cut anytime soon. Even as coal concerns have weighed on the stock, six different insiders have combined to buy $4.4 million worth of shares in the past month. With a 10.9% yield and insiders buying stock, Natural Resources Partners would seem to be a solid choice for income hungry investors.

Limiting your purchases to MLPs with recent insider buying should help you avoid devastating dividend cuts. Other MLPs with multiple insider buys recently include Martin Midstream Partners (MMLP), Ferrell Gas Partners (FGP) and Eagle Rock Energy Partners (EROC).

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As of this writing, Tim Melvin was long RNO and BWP.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/mlps-insider-stocks/.

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