7 Master Limited Partnerships to Buy Despite Rising Rates

MLPs still offer far superior returns if you pick the right ones

By Josh Enomoto, InvestorPlace Contributor

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In recent years, the broader markets have enjoyed robust performances. The bullishness is a net positive for conservative investors who adopt more or less a buy-and-hold strategy. However, those seeking outstanding returns have been left wanting. For those folks, they may want to consider master limited partnerships, or MLPs.

By definition, master limited partnerships are companies structured as limited partnerships that are also publicly traded. MLPs essentially combine the tax benefits associated with this type of structure and the liquidity of a typical stock. But for the investor, this market category has a major advantage: generous yields.

Master limited partnerships are typically levered towards the energy market. While this sector is obviously prone to volatility, it’s also a high-demand segment. We can complain about rising gas prices all we want, but when push comes to shove, we’ll find a way to manage.

That said, critics of MLPs don’t recommend these companies as stocks to buy. Usually, the reason involves around rising benchmark interest rates. For better or for worse, President Donald Trump has consistently blasted prior economic policies. The markets have responded with higher rates, making newly issued bonds attractive.

In theory, this puts master limited partnerships at a disadvantage. The thinking is, why consider risky stocks to buy when you can have ultra-safe investments delivering decent passive income?

Admittedly, this is a fair point. However, the typical payout of strong master limited partnerships is still far superior to government-issued bonds. In addition, several MLPs are offered at a discount because of this common reaction, as well as other factors.

If you like contrarian opportunities, MLPs represent a viable pathway. Here are seven such stocks to buy:

Magellan Midstream Partners (MMP)

Dividend Yield: 5.9%

For those seriously considering a dive into master limited partnerships, take a good look at Magellan Midstream Partners (NYSE:MMP). Before we get into the details, Wall Street appears to be turning around on MMP.

In the dead of summer, covering analysts were decidedly unsure about the company. But as the months rolled on into the autumn season, fence-sitters started vacating. Now, bullish and “holding” analysts are even with seven a piece.

Admittedly, it’s still too early to tell where MMP is heading, which is why units are currently stuck in consolidation. But that’s also the reason why I like it. The pessimists are worried about the impact that rising rates will have on Magellan. On the flipside, unitholders are enthralled with the company’s generous 5.9% dividend yield.

I’m backing the bulls on this one. While rising rates theoretically make dividend stocks to buy less attractive, the economy is generally improving. That means more people have increased discretionary income, which should lift energy demand. Ultimately, that’s a tailwind for MMP.

Enterprise Products Partners (EPD)

Dividend Yield: 5.9%

As a rule of thumb, anytime you want to tread unfamiliar investing waters, you want to go with reputable names. Among master limited partnerships, few companies exist that are more stable and recognized than Enterprise Products Partners (NYSE:EPD).

Originally founded in the late 1960’s, EPD had its initial public offering in 1998. The company specializes in midstream energy services, with key operations in the Delaware basin and Permian basin. More importantly for unitholders, EPD has mostly provided consistent returns, making its lofty 5.9% yield less risky than the print would imply.

But what likely endears most buyers to EPD stock is management’s fiscal discipline. Historically, the leadership has refused to take on irrational risks. Further, the company’s recent financial performances provide much-needed confidence in the sector. Growth is steadily climbing back towards pre-energy-crisis levels, while free cash flow has remained consistently positive.

Energy Transfer Equity (ETE)

Energy Transfer Equity (ETE)
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Dividend Yield: 7.1%

Headquartered in Dallas, Texas, Energy Transfer Equity (NYSE:ETE) specializes in natural gas storage and transportation. ETE is a massive energy empire, levering over 71,000 miles of pipelines related to natural gas and crude oil products. Moreover, the company operates several lucrative projects, including the Dakota Access and Rover pipelines.

The biggest draw for investors, though, is Energy Transfer Equity’s generous payout. With a dividend yield sitting pretty at 7%-plus, it’s difficult to ignore ETE, even if you have sworn off MLPs. Additionally, its underlying sector has received a tremendous boost. For instance, since hitting bottom in early 2016, the natural gas liquid composite price domestically has more than doubled.

So while ETE experienced significant volatility following the recent energy market crisis, things have stabilized significantly. Management is also keeping its debt levels under control while boosting sales. Among master limited partnerships, analysts consider ETE as a riskier trade, but the improving sector conditions help bolster confidence.

Shell Midstream Partners (SHLX)

Dividend Yield: 6.9%

Taking a page out of the playbook of other major energy firms that have spun off their assets, in 2014, Royal Dutch Shell (NYSE:RDA.A, NYSE:RDA.B) spun off its midstream business to form Shell Midstream Partners (NYSE:SHLX).

Although a separate entity on paper, SHLX is deeply embedded with Royal Dutch Shell. The latter is the former’s general partner, and owns almost half of its limited partner units. Moreover, Shell Midstream’s parent company provides the spin-off’s assets and revenues.

This somewhat distinctive structure shouldn’t dissuade you from SHLX. Quite the opposite — having the backing of one of the biggest oil firms in the world should inspire confidence. If that doesn’t work, Shell Midstream’s 6.9% dividend yield should do the trick.

Compared to other MLPs in the sector, SHLX features outstanding profitability margins. It’s also growing sales at a strong rate. The company’s most recent quarterly revenue was $129.3 million, up 15% from the year-ago level. Finally, SHLX enjoys consistent and positive free cash flow.

Brookfield Property Partners (BPY)

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Dividend Yield: 6.5%

While the majority of master limited partnerships center on oil and energy markets, not all MLPs are like this. Case in point is global real-estate firm Brookfield Property Partners (NASDAQ:BPY).

Now, it’s worth pointing out that I’m not the biggest fan of real estate at this juncture. Rising interest rates make it harder for first-time buyers to acquire a home. Further, some metropolitan areas have seen prices launch into crazy-ville. That being said, I like BPY because of their worldwide footprint, which extends out to 30 countries.

Beyond that, BPY features an extremely diversified asset base. Brookfield has exposure to various infrastructures, including utilities, transportation and agriculture. And while I mention BPY as one of the non-energy MLPs, it does have energy transmission and storage services.

Of course, most investors are eyeing BPY for its 6.5% dividend yield. This is where the situation gets a little tricky. The company is steadily growing its revenue stream, but its free cash flow has seen plenty of red ink. Recently, though, management is shoring that up, making BPY an intriguing contrarian play.

Alliance Resource Partners (ARLP)

Alliance Resource Partners (ARLP)
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Dividend Yield: 10.3%

If President Trump had a basket of master limited partnerships, I’d bet that Alliance Resource Partners (NASDAQ:ARLP) would be on that list. Why? Because buying units of ARLP is buying into coal, the definitive power source of the 19th century.

Okay, I’m only kidding. Believe it or not, coal remains a viable energy source for many American families. More importantly, the rest of the world is deeply vested in coal, which feeds 37% of international electricity demand.

Of course, coal gets a black eye due to political undertones. First, Trump trumpeted coal, which drove environmentally friendly Democrats nuts. Second, the current administration exited the Paris agreement. That too rankled the left.

But underneath the political bickering lies the human element. Companies like ARLP hire tens of thousands of blue-collar workers. Former Secretary of State Hillary Clinton’s proposal for them to find new jobs just didn’t resonate.

The other point is that green energy solutions or whatever is the trendy term doesn’t work as advertised. I mentioned this concept in my recent article covering General Electric (NYSE:GE). Namely, clean energy doesn’t exist. If you want usable, practical and immediate energy, you need to burn something.

For ARLP, that something is coal. Unless Democrats find a way to change our laws of physics, coal will likely stay with us for a while. And even if you absolutely hate coal, I’m sure you’ll love Alliance Resource’s 10%-plus dividend yield.

StoneMor Partners (STON)

StoneMor Partners (STON)
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I mentioned at the top of this write-up that MLPs attract buyers for their generous yield. But an MLP that doesn’t pay out? That seems completely pointless. But before you get out the pitchforks for my choice of StoneMor Partners (NYSE:STON), please hear me out.

In life, we have two guarantees: death and taxes. STON addresses the former. According to the Centers for Disease Control and Prevention, 2.7 million Americans die every year. But because the U.S. saw a massive surge in population following World War II, funeral homes and cemeteries will experience huge demand.

That suits STON just fine. With 322 cemeteries and 93 funeral homes in 27 states and Puerto Rico, StoneMor owns the second-largest network of the so-called “deathcare” industry.

But make no doubt about it, STON is a highly speculative trade. It’s a gamble that the markets have overcooked bearish sentiment. Despite the bullish underlying sector, StoneMor is a poorly managed, highly indebted organization. Thus, units are down nearly 20% year-to-date.

At the same time, STON has jumped over 46% since July 23. Admittedly, this is a volatile trade. And if I’m being honest, I’m not sure if I would want to be buried in StoneMor’s facilities. But as a gamble on deathcare? You have to admit it’s enticing!

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/10/7-master-limited-partnerships-to-buy-despite-rising-rates/.

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