Buy MLPs for the Right Reasons

Focus: STOCKS

Peter Staas Image Peter Staas Managing Editor, Capitalist Times and Energy & Income Advisor

Energy master limited partnerships have been on a tear, and it's all the more reason you should be very choosy before buying newcomers and old timers, says Peter Staas of Energy and Income Advisor.

Gregg Early: I am here with Peter Staas, managing editor of Capitalist Times.

Peter, when I look at the marketplace, even though stocks have gone up and the third quarter was supposedly a great quarter, people are still kind of hunkered down looking for income. Where is the best place to find the big yields these days that isn’t overbought? Where is it overlooked?

Peter Staas: Investors are definitely on the hunt for yield. Especially with where interest rates are right now, there isn’t much out there.

One of the traditional high-yield sectors that we like are energy-focused master limited partnerships (MLPs). They have become increasingly popular among investors—the secret is out. The Alerian MLP Index is yielding about 5.7%, which is down considerably from the summer of 2011 and earlier this summer.

You have 47 different funds that focus on the space now, close to 30 of which have launched within the past two years or so. It’s definitely a lot of money moving into this space.

One mistake that we see investors making who are looking for yield is that they are looking for the highest-yielding stuff. In the MLP space, there is a reputation that it’s a lot of toll road-type, consistent cash flow generators. A lot of this higher yield stuff does have risk; you need to understand what you are investing in.

Gregg Early: So you are talking about more of sustainability of the dividend or the investment, more than just looking at the number.

Peter Staas: That’s true.