Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
One more New Entry, a High-Yielder
12/29/2006 12:00 am EST
Natural resources expert Elliott Gue also finds 'energy' in a newly-public offering, an expanding natural gas company organized in a structure that offers investors an opportunity to collect generous income while anticipating the equity's appreciation...
"Master Limited Partnerships (MLPs) remain far and away my top income idea for the long-term. These stocks have also been extraordinarily strong performers for our portfolios.
"US MLPs and limited liability companies are in a position similar to real estate investment trusts (REITs) in the early to mid-'90s. Back then, REITs were still a poorly understood, small asset class. But REITs offered high yields (6-8%), coupled with strong growth in distributions, and a tax-advantaged structure. Looking for income, investors started piling into the sector in a big way.
"MLPs today offer some of the same advantages REITs did then. Because of tax law changes in 2004, they're just starting to gain attention from institutional investors. The average yield of MLPs is 6-7%--well above the average REIT. Dividend growth is comparable or faster than what REITs were able to deliver back in the early to mid-'90s. And while payout growth for REITs has slowed to less than 3% annualized nowadays, some MLPs are showing distribution growth of more than 10%.
"With the massive baby boomer generation nearing retirement age, Americans--more than ever before--are in search of income. MLPs and other pass-through partnership structures will be a major component of their portfolios in the future.
"I'm adding Eagle Rock Energy Partners (EROC NASDAQ GM) as a speculative MLP play into the Wildcatters Portfolio.
"Eagle Rock is a new MLP initial public offering (IPO), just listed in late October. Young MLPs have two advantages: First, they generally have low incentive distribution splits with their general partners. Second, younger MLPs generally sport the highest potential distribution growth in the MLP universe. These partnerships have extensive capability to grow distributions from a low base. High distribution growth has been a key driver for MLP performance in recent quarters; that's why new MLP IPOs have typically performed extraordinarily well over the past two years.
"Eagle Rock operates gas gathering pipelines and gas processing facilities. The MLP is targeting a full-year payout of $1.45 per unit. At $20, that equates to around 7.25%. And the company has room for acquisitions of additional pipelines and facilities near its core markets, so distribution growth should remain solid during the next two to three years.
"New MLPs like Eagle Rock are riskier plays than established companies; that's why I'm recommending it in the Wildcatters Portfolio. However, the rapid growth potential makes Eagle Rock a buy under $21.50."
The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...