A fresh MLP article.
MLPs Offering Inflation Protection and Income
Wednesday July 7, 2010, 12:30 pm EDT
Although interest rates and fears about inflation subsided during the most recent correction, investors should be aware of the looming inflation risks down the road, according to Mike Finnegan, CIO of Principal Funds and manager of the Principal Diversified Real Asset Fund. In a press release last month, Finnegan noted, "We look at inflation risk as an ever-present risk that all investors should take into consideration." According to the report, real assets offer a vehicle investors can use to hedge against inflation and manage risk. While there are plenty of hard asset alternatives, income oriented investors may find that MLPs fit the bill, offering both high-yields, and partial energy exposure, thus providing inflation protection and income.
As a whole, the MLPs Index is ahead by more than 1% for the session. Though the Index is moving up the same amount as the broader market today, over the past month MLPs have outperformed the S&P by better than 8%.
Because of the diversity of MLPs available, investors need to make sure they understand what they are buying into. For instance, pipeline MLPs collect income by transporting and storing oil and gas. In essence they act as toll takers, charging to move commodities through the pipeline. In many cases the rate charged is linked to the producer price index (PPI), giving them a solid tie to inflation while also providing protection against energy prices, since companies will need to transport oil no matter what happens to the price. Pipelines tend to trade at a higher premium than others in the industry because of their relative stability, but natural gas pipeline Boardwalk Pipeline Partners (NYSE: BWP - News) still yields nearly 7%. Diversified pipelines like Enterprise Products Partners (NYSE: EPD - News) and Kinder Morgan Energy Partners (NYSE: KMP - News) also pay large dividends, both sporting over 6% annual payouts. Another MLP in the space to consider is Genesis Energy (AMEX: GEL - News). The firm currently yields 8%, but it has a track record of consistently raising dividends, including the most recent quarterly distribution.
Investors searching for securities that are more directly linked to energy can look to energy producers like Legacy Reserves (NASDAQ: LGCY - News) and EV Energy Partners (NASDAQ: EVEP - News). Both sport 9% yields, but are more volatile, given that they are exploration and production plays. And a total of 12 Pro investors counted energy producer Linn Energy LLC (NASDAQ: LINE - News) in their top-15 U.S.-listed equity holdings at the start of Q2, giving them nearly 10% in annual dividends.
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