Partnership Duo for Tortoise Investors

01/28/2015 9:00 am EST

Focus: MLPS

Our Tortoise Portfolio aims to outperform the S&P 500 Index over a full market cycle; companies in this portfolio tend to be mature, relatively slow-growing, and have moderate to low risk, explains Matthew Coffina, editor of Morningstar StockInvestor.

New purchases must have an economic moat, preferably wide. I attempt to tilt the portfolio toward companies with, at least, stable competitive advantages (stable moat trends). Here's a look at a pair of current favorites:

Magellan Midstream Partners (MMP)

I consider Magellan the gold standard among master limited partnerships. It offers minimal commodity price sensitivity, enough cash flow to cover the distribution 1.45 times, and a track record of rapid distribution growth.

The partnership also offers moderate financial leverage, no need to issue new equity to fund capital projects, and a highly conservative management team.

We project 12% annual distribution growth over the next five years, which makes Magellan worthwhile even though the distribution yield of 3.2% is low by historical and competitive standards.

Note that—as a master limited partnership—Magellan involves certain personal tax complications and isn’t suited to tax-deferred accounts such as IRAs. I suggest Spectra Energy as an alternative for tax-deferred accounts.

Enterprise Products Partners (EPD)

Enterprise is a bit riskier than Magellan because of its greater direct and indirect exposure to commodity prices and North American drilling activity.

However, management is similarly conservative, and the combination of a diverse asset base and distribution coverage around 1.4 times provides an ample margin of safety. Investors are also compensated for Enterprise’s greater risk through a materially higher distribution yield of 4.0%.

The company has raised its distribution every quarter for more than ten years, including throughout the financial crisis. Note that Enterprise is also organized as a master limited partnership.

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