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MLPs A Refuge From Chaotic Energy Cycle
Volatility is the name of the game these days for markets where 100 point gains followed by 200 point drops seem to be the norm. Turn on CNBC and the stories are fixated on energy and commodity prices. Inflation headlines rule almost every financial publication. So, how can future retirees profit from energy without having to deal with the daily rollercoaster?
The answer is a master limited partnership (MLP).
Rather than owning the price sensitive commodity itself, MLPs engage in the storage, processing and movement of crude oil and natural gas. Cash flows for partnerships are based on the volume of product moving through their pipelines, tanks and refineries, and due to their tax-structure they pay out most of this to shareholders. This helps explains MLPs' above average dividend rates which are usually in the 5-8% range. (To learn more about these unique investments, read our related article Discover Master Limited Partnerships.)
Closed-End Funds For Your IRA
There are some tax considerations when purchasing partnerships, specifically involving a K-1 statement and cost basis adjustments to share price. This also includes an unsuitability of partnerships for IRA accounts caused by the unrelated business taxable income (UBTI) they can generate. Investors who want to get their feet wet in master limited partnerships should consider the following three funds. Each is a closed-end fund that owns MLPs, offering a wide swath of the sector. These funds present their dividends in a single 1099 form, for those who do not understand or want the hassle of dealing with a K-1 statement. And in my opinion the best reason to own these is that they can be placed inside retirement accounts without incurring UTBI, thus benefitting from the long-term nature of the assets and the long-term nature of an IRA. (To learn why these investment vehicles are worth a second look, read Open Your Eyes To Closed-End Funds.)
Kayne Anderson MLP Investment Corp (NYSE:KYN)
This fund is the behemoth of the group. It controls over 1.9 billion dollars of MLP assets and is the largest institutional investor in the space. One of Kayne Anderson's benefits, due to its immense size, is the ability to participate in private equity and secondary offering transactions. Kayne Anderson offers a healthy mix of limited partnerships, from older more established firms such as Kinder Morgan (NYSE:KMP) to newer partnerships such as Crosstex Energy (Nasdaq:XTEX).
KYN is currently yielding a healthy 7.43% and has increased its dividend more than 32% since the funds inception in 1994. While it is usually better to purchase closed-end funds shares at a discount to their net asset value, the slight 10% premium Kayne Anderson trades at, in my opinion, is justified do the firm's expertise and size.
Tortoise Energy Infrastructure Corp (NYSE:TYG)
Tortoise Energy Infrastructure can viewed as Kayne Anderson's younger brother. The fund contains investments in 41 different MLPs for assets totaling $1.2 billion. The largest investments of which are located in crude oil pipeline sector. Tortoise Energy Infrastructure has returned 11.9%, based on share price since its inspection in February 2004. The firm also yields 7.4%, compared to the 5% NAREIT average for real estate investment trusts.
Tortoise Capital Resources ETF (NYSE:TTO)
My favorite in the space is technically not a closed-end fund at all, but a business development company (BDC). As a BDC, Tortoise Capital Resources makes investments in privately held companies in the way of loans, often with an equity kicker. By purchasing Tortoise Capital Resources, investors are given the chance to participate in many of the up-and-comers in the pipeline and energy distribution sectors. This includes an investment in coal producers.
Currently Tortoise Capital is trading under its net asset value and is yielding a very healthy 9.8%. It's also worthy to note that in the fund's short history, it has raised its dividend every quarter. Tortoise Capital has also returned 7.31% since inception, based off of the fund's NAV.
Bottom Line
With the day-to-day market gyrations, an investment in master limited partnerships can provide a safety net. Their predictable cash flows and high barriers to entry make them perfect places to wait out the storm. The preceding funds are a great way for investors to try their hand at pipeline companies before moving on to individual names in the sector.
The answer is a master limited partnership (MLP).
Rather than owning the price sensitive commodity itself, MLPs engage in the storage, processing and movement of crude oil and natural gas. Cash flows for partnerships are based on the volume of product moving through their pipelines, tanks and refineries, and due to their tax-structure they pay out most of this to shareholders. This helps explains MLPs' above average dividend rates which are usually in the 5-8% range. (To learn more about these unique investments, read our related article Discover Master Limited Partnerships.)
Closed-End Funds For Your IRA
There are some tax considerations when purchasing partnerships, specifically involving a K-1 statement and cost basis adjustments to share price. This also includes an unsuitability of partnerships for IRA accounts caused by the unrelated business taxable income (UBTI) they can generate. Investors who want to get their feet wet in master limited partnerships should consider the following three funds. Each is a closed-end fund that owns MLPs, offering a wide swath of the sector. These funds present their dividends in a single 1099 form, for those who do not understand or want the hassle of dealing with a K-1 statement. And in my opinion the best reason to own these is that they can be placed inside retirement accounts without incurring UTBI, thus benefitting from the long-term nature of the assets and the long-term nature of an IRA. (To learn why these investment vehicles are worth a second look, read Open Your Eyes To Closed-End Funds.)
Kayne Anderson MLP Investment Corp (NYSE:KYN)
This fund is the behemoth of the group. It controls over 1.9 billion dollars of MLP assets and is the largest institutional investor in the space. One of Kayne Anderson's benefits, due to its immense size, is the ability to participate in private equity and secondary offering transactions. Kayne Anderson offers a healthy mix of limited partnerships, from older more established firms such as Kinder Morgan (NYSE:KMP) to newer partnerships such as Crosstex Energy (Nasdaq:XTEX).
Tortoise Energy Infrastructure Corp (NYSE:TYG)
Tortoise Energy Infrastructure can viewed as Kayne Anderson's younger brother. The fund contains investments in 41 different MLPs for assets totaling $1.2 billion. The largest investments of which are located in crude oil pipeline sector. Tortoise Energy Infrastructure has returned 11.9%, based on share price since its inspection in February 2004. The firm also yields 7.4%, compared to the 5% NAREIT average for real estate investment trusts.
Tortoise Capital Resources ETF (NYSE:TTO)
My favorite in the space is technically not a closed-end fund at all, but a business development company (BDC). As a BDC, Tortoise Capital Resources makes investments in privately held companies in the way of loans, often with an equity kicker. By purchasing Tortoise Capital Resources, investors are given the chance to participate in many of the up-and-comers in the pipeline and energy distribution sectors. This includes an investment in coal producers.
Currently Tortoise Capital is trading under its net asset value and is yielding a very healthy 9.8%. It's also worthy to note that in the fund's short history, it has raised its dividend every quarter. Tortoise Capital has also returned 7.31% since inception, based off of the fund's NAV.
Bottom Line
With the day-to-day market gyrations, an investment in master limited partnerships can provide a safety net. Their predictable cash flows and high barriers to entry make them perfect places to wait out the storm. The preceding funds are a great way for investors to try their hand at pipeline companies before moving on to individual names in the sector.
by
Aaron Levitt
Aaron Levitt is a SABEW investment journalist and analyst living in State College, Pennsylvania. His work appears in several high profile publications in both print and on the web. Aaron is a graduate of The Pennsylvania State University where he studied Economics and International Business and he is an advocate for long-term investing with a global framework. You can follow his picks and pans at @AaronLevitt
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