By Nathan Slaughter, GlobalDividends.com
They aren’t stocks, and they aren’t bonds… but these securities yield up to 13%, offering investors the chance to capture high yields and explosive growth. Their spectacular returns have even made them the top-performing asset class during the last decade.
One of the most successful high-yield energy investments in the world is a type of security that few investors even know exists, let alone own.
They aren’t stocks, and they aren’t bonds, but they are the #1 performing asset class over the past 10 years — up 288%. Stocks are up just 31% over that stretch and bonds, which have been in a major bull market, are up 71%.
Many of these companies have raised dividends at an almost 10% annual pace over the last decade. And their prices have also risen, generating total annual appreciation in the 15%-20% range.
That’s why these investments give you the exact same double whammy — high yields and explosive growth — that has propelled so many big winners to the top of the 21 best income stocks of the past decade I told you about in the last issue of Dividend Opportunities.
The securities I’m talking about are called master limited partnerships — or MLPs for short — and they have two overriding characteristics. They are overwhelmingly in the energy business, and they usually pay high yields — 5% to 7% on average — and upwards of 13% for some profitable firms.
What drives the yields of these securities is the business they’re in.
MLPs are publicly traded limited partnerships that run critical “midstream” energy infrastructure. That’s the pipelines, storage tanks, terminals and ships that move energy from producer to user.
In short, they are the arteries through which our economic lifeblood flows.
And the beauty of MLPs is that while they are energy companies, they are insulated to some extent from price fluctuations in commodities.
For MLPs, it’s more about demand. For most of their revenues, it doesn’t matter if oil is at $50 a barrel or $150. As long as the stuff keeps flowing through their pipelines, they profit — along with their investors.
That’s one big reason why MLPs have steadily churned out double-digit total returns year after year, despite volatile commodity prices.
Another reason is because MLPs pay out upwards of 90% of their profits to investors — making them some of the highest-yielding investments on the planet.
While most investors are drawn to the high yields these businesses throw off, plenty of these partnerships have also grown impressively, creating sizable capital gains for investors.
For example, Enterprise Products Partners (NYSE: EPD) was launched in 1998. A $10,000 investment back then would now be getting $5,322 a year in distributions — a 53% annual yield on the initial investment. And that’s on top of a capital gain of about 150%. Assuming distributions were reinvested, the total gain today would be more than $80,000.
Enterprise is by no means an isolated example. And if you’re looking for sky-high yields, a quick search shows the top yielder in the group is Niska Gas Storage Partners (NYSE: NKA), which pays more than 13% — and at least eight other MLPs come close to matching that impressive number.
Now, I’m not saying that MLPs represent a risk-free investment. They tend to deliver steadier results, but they’re not without risk.
For example, the Alerian MLP Index — which is a handy proxy for the major MLPs — fell sharply in 2008.
But there are some compelling reasons that I think will drive MLPs higher over the next three to five years — and maybe into the much longer term.
Global demand for energy has been, and continues to be staunch. In fact, we’ve only seen one decline in annual energy consumption in the past 30 years.
Meanwhile, the spread of production technologies like directional drilling and hydraulic fracturing have opened huge new sources for oil and gas production from shale formations in the United States. According to industry insiders, the energy being produced from the shale in places like Eagle Ford in south Texas is already outstripping the available pipeline and storage capacity. This shale boom has led to a big increase in the need for the energy infrastructure that these MLPs provide.
[Note: For more on MLPs and the high-yield opportunities you can find from the energy sector, I invite you to watch my latest presentation. I’m convinced there is no better place to search for income than the energy field. In fact, of the 21 best-performing dividend payers since 2001, more than half are energy stocks. You can get all the details, including the full list of all 21 securities by visiting this link.]
Good investing!
Nathan Slaughter
Chief Investment Strategist
Energy & Income
Disclosure: Nathan Slaughter does not own shares of the securities listed in this article. StreetAuthority owns shares of EPD as part of the company’s various $100,000 “real money” portfolios. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any “real money” model portfolio.