One Of Our Favorite Income Investments Is On Sale

David Sterman's picture

Monday, September 28, 2015 - 10:30am

by David Sterman

Investors are not a discriminating lot. We've seen full evidence of this during the past few weeks.

When they panic and hit the sell button, all stocks seem to get placed on the chopping block, regardless of whether they have strong or weak balance sheets, ample or minimal exposure to the turmoil in China, low valuations or high valuations...

That blunt, indiscriminate approach also applies to sectors and industries. Potentially bad news for a few companies can lead a whole group to be tossed into the dustbin.

That appears to be the case among one of our favorite income investments here at StreetAuthority: the energy-focused master limited partnerships (MLPs).

In today's essay, I'm going to show you why the selling is overdone -- and how smart investors can take advantage and buy some of the best income-generating assets the market has to offer at compelling low prices.

Although dozens of MLPs offer up a range of risk profiles, all have plunged sharply in recent weeks and months.

And a man named Greg Armstrong may be to blame.

Armstrong is the CEO of Plains All America Pipeline L.P. (NYSE: PAA). Plains All America falls into the "infrastructure" MLP category. The partnership owns and operates a network of energy pipelines and storage facilities.

In early August, Armstrong noted that his firm's impressive dividend growth streak, which lasted for 24 straight quarters, may need a breather. Looking ahead to third and fourth quarter payments, he told investors during the partnership's quarterly conference call, "we're waffling quite candidly on if there's going to be any distribution growth or if it's going to be modest."

It may be helpful to re-read that quote. Armstrong didn't say the dividend needed to be cut -- only that it is unlikely to grow in the next few quarters. If investors stayed on the conference call long enough, they would have heard Armstrong also note that "we anticipate adjusted EBITDA for 2016 and 2017 will increase in the neighborhood of 10% and 30% respectively over our 2015 guidance."

In other words, this MLP's dividend streams should resume their upward climb after this year's pause.

Still, investors decided to abandon ship anyway. Shares, which traded for $60 a year ago and $50 this past spring, have meandered to just below $32. And this stock, which historically sported a mid-single-digit dividend yield, now yields 8.6%.

Falling Oil Prices

Considering the payout is still likely to rise in 2016 and 2017, that strikes me as a value too good to pass up.

Another Favorite MLP Is On Sale
Several of our analysts here at StreetAuthority have been steadfast supporters of MLPs like PAA for years. And now, they're on sale.

These infrastructure MLPs are what we at StreetAuthority like to call "irreplaceable assets." They can't be easily copied by competitors and often operate on a fixed-fee basis, creating reliable, recurring revenue streams for investors. Oil and gas prices may rise and fall, but the storage and transmission fees for these MLPs are virtually locked in.

Enterprise Products Partners (NYSE: EPD) is one of the nation's largest infrastructure MLPs. It owns nearly 20,000 miles of energy pipeline assets and more than a dozen energy storage depots. Billions have been spent building up those assets, which now churn out hundreds of millions of dollars.

In light of the recent MLP sell-off, it's worth noting that Enterprise's 2Q 2015 EBITDA came in at nearly $1.3 billion, higher than the $1.25 billion the firm saw during the second quarter of 2014, when oil prices were over $100 per barrel.

That hasn't helped this stock to weather the storm, though. Nearly $25 billion in market value has been erased in the past few months. But this means investors who buy in to Enterprise right now are getting a great business at an incredible discount.

Not only has the stock raised its dividend 46 times in a row, but Nathan's subscribers are sitting on a total return of 148%. Best of all, thanks to the pullback in price, investors who buy today will be earning a yield of nearly 5.7%.

Time Is Running Out
Nathan pointed out in a recent update to his subscribers that we're already beginning to see shares of some MLPs rebound from their recent lows. But as he points out:

"Don't throw a wild celebration just yet. This sector isn't completely out of the woods, and all of these stocks are still trading substantially below their recent highs. But every recovery has to have a starting point -- and this is a powerful bounce.

Fortunately, it's being driven by something other than speculative bargain hunting. There is increasing evidence that (contrary to widespread fears) these businesses aren't unraveling at the seams amid weak oil prices. Instead of lowering their cash-flow outlooks, several are revising their profit outlooks upward."

Add it all together and it's easy to see why Nathan and I are intrigued by MLPs right now. MLPs like Enterprise Products Partners form the backbone of Nathan's High-Yield Investing portfolio. And right now, investors have the chance to follow one of the most basic investing concepts laid down by Warren Buffett -- buy shares of good companies while they are sharply out of favor.

And right now, the infrastructure MLPs, which have built powerful long-term business models, are offering a rare bargain bin opportunity.

P.S. Nathan has been telling his readers about a little-known group of stocks that have raised their dividends a combined 151 times in the past decade and currently pay an average yield of 7.4%. They've also returned more than 300% on average over the past 10 years.

I can't think of a safer group of stocks I'd want to own right now. These are among the best performing, most shareholder friendly stocks you'll find anywhere. It's no wonder why Nathan calls them the "High-Yield Hall of Fame."

If you haven't seen his latest research on this elite group of dividend payers, then I urge you to check them out now. You can find out how to get his entire list of "Hall of Fame" today simply by clicking here.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.