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Energy MLPs Were a First-Half Gusher

24 July 2014 in Trading Ideas

The combination of a domestic gas and oil boom and investors’ constant search for income has worked in favor of those investing in master limited partnerships.

The Energetic MLPs motif, for example, has risen 15.8% this year. During that same time period, the S&P 500 has gained 9.7%.

In the past month, the motif has increased 3.6%. The S&P 500 has returned 1.4% in the same time period.

A recent report by Morningstar of the top-performing equity, commodity and alternative mutual funds for the first half of 2014 listed six MLPs in the top 10. The analyst firm noted that these funds have been outpacing the broader equity group for the past few years and have made up the bulk of new funds launched this year. Since 2010, 19 MLP funds have launched, according to Morningstar.1


Part of the growth in the MLP performance has come part and parcel with the forming of more MLPs – according to the National Association of Publicly Traded Partnerships, there are now 139 MLPs currently in existence.2

As Bloomberg Businessweek noted, MLP structure pre-dates the current shale oil and gas revolution, but demand for more pipelines to ship growing production has bolstered their popularity. MLPs are seen as a good fit for pipeline companies because of the requirement that such companies, which are required to distribute their cash flow to their limited partners, require sources of cash flow that are stable. Interstate pipelines tend to be backed by long-term fee-based contracts, according to a Businessweek source.

Cash payouts, of course, have appeared to be attractive to investors throughout the year. As the Wall Street Journal recently pointed out, large investors have spent the year snapping up stocks that provide steady income, which is an endorsement of corporate health but also a sign of apprehension over the US market’s five-year bull run.3

Many stocks that pay out dividends and other types of distributions, such as utilities, real-estate investment trusts, and MLPs, have risen more than major indexes since the start of the year.

In addition, bond yields have remained stubbornly low and the Federal Reserve has signaled that it is in no rush to raise interest rates, boosting the lure of stocks offering payouts. Morningstar reported that through May utility and energy limited-partnership-focused funds in the US brought in $.6.08 billion in new investor cash, up from $4.21 billion in the year-earlier period.

That’s not to say there isn’t risk surrounding income-oriented stocks – as the Journal mentioned, the recent rally in REIT stocks still hasn’t offset last year’s losses that came amid concerns of the Fed’s eventual wind-down of its stimulus program.

However, with stocks essentially treading water so far in July, the attractiveness of income-generating stocks could have some more staying power.

1Cara Esser, “In 2014’s First Half, MLPs Reign King,” Morningstar.com, July 18, 2014, http://news.morningstar.com/articlenet/article.aspx?id=655918, (accessed July 22, 2014).

2Stephanie Ritenbaugh, “Demand for pipelines bolsters MLPs,” businessweek.com, July 1, 2014, http://investing.businessweek.com/research/stocks/news/article.asp?docKey=600-201407010808KRTRIB__BUSNEWS_62308_2837-1&ex=true&ticker=NBL. (accessed July 22, 2014).

3Matt Jarzemsky, “Dividend-Paying Stocks Draw Investors,” wsj.com, July 7, 2014.

Investors should be aware of unique risks and tax consequences involved with MLPs. Distributions are treated differently than stock dividends. Income distributions received from MLPs are typically reported on a Schedule K-1. Certain MLPs that have operations in multiple states may need to file tax returns within each state, based on income limits. Income limits may also make investments in MLPs inappropriate within retirement accounts. Investors may wish to consult with their tax advisor prior to making an investment decision.