|Home||About Us||Resources||Archive||Free Reports||Market Window|
Wednesday, October 1, 2008
Yesterday, a colleague asked for my top income idea right now. Here's what I told him...
Master limited partnerships (MLPs) are the American equivalent of Canadian income trusts. They pay no tax. They return all their profit to unit holders (another word for shareholders) in large monthly distributions. There are close to 100 MLPs trading in the stock market. And they're the absolute best place to look for big, safe dividends.
Most MLPs operate oil and gas infrastructure, like pipelines, processing plants, and storage tanks. The sector is having a banner year... Giant new gas discoveries in Wyoming, Texas, Oklahoma, and the Appalachian region have propelled demand for energy infrastructure. The sector is producing record cash flows, generating record dividend payments, and growing faster than it has ever grown before.
I looked up the most recent quarterly results for the 10 largest pipeline master limited partnerships. Nine of the 10 have raised their dividends in the last three months. Revenues are up. And profits are growing. Boardwalk Pipeline Partners (BWP), for example, just made its 11th consecutive dividend increase... reported an 83% jump in profits... and beat analysts' expectations by 40%.
The 12 MLP funds that trade on the market are paying an average 8.2% dividend yield today.
Lehman Brothers was the prominent investment bank in the MLP sector. It acted as a major advisor and underwriter in the MLP market. It loaned money to MLPs. It helped MLPs hedge their exposure to oil, gas, and interest rates.
Lehman Brothers also had huge positions in MLPs through its asset management and private-equity subsidiaries. From disclosures in Lehman's last quarterly report and other online sources, I deduced Lehman controlled at least $4.5 billion of MLP securities on June 30, 2008... about 3.5% of the entire MLP market. It's no surprise the MLP market cratered when Lehman unloaded billions of dollars of its holdings...
Besides Lehman, Goldman Sachs, Morgan Stanley, Merrill Lynch, and Macquarie Infrastructure Trust were all among the top 10 largest institutional owners of MLPs. These firms are the shakiest in the market. They're scrambling to raise liquidity. I bet they're dumping their MLP positions, too.
At these prices, you should load up on MLPs and prepare to hold them for at least a decade...
MLPs are protected from inflation. A $10 payment might look fine today. But in five years, $10 won't buy a ride on the subway. It's no good investing for income if inflation undermines your returns. This is what will happen to fixed-income bond investors. But MLPs pay dividends that rise with inflation, so you'll never be left behind. Alerian Capital Management is the Dow Jones of the MLP sector. It created the MLP index. Alerian estimates the MLP industry's combined 2008 cash distribution to unit holders will be 12% higher than 2007's distribution.
Also, MLPs are 100% hard-asset investments. Assets in the MLP business are made of steel, copper, energy, labor, and large amounts of capital. The beauty of these assets is, once built, they represent almost no risk to your investment. You can just sit back and collect dividends. Take pipelines, for example. Once you've dug the trench and buried the steel tube... You have nothing else to do. The revenue is almost all income. It doesn't matter what's happening on Wall Street... or in Washington... your steel tube will crank out dividends for the next 100 years.
THE "LINE IN THE SAND" FOR THE WORLD ECONOMY
For much of the past three years, we've pointed to the strength in copper prices as a sign that things "aren't so bad" in the global economy.
The price of copper is an excellent gauge of the world's economic health. Copper goes into transmission lines, plumbing, automobiles, appliances, and electronic equipment. So it rises and falls with manufacturing, infrastructure spending, and residential construction.
Along with the rest of the world's assets, copper entered a huge bull market in 2003. It lasted three years and was good for a 400% gain. After peaking in 2007, copper moved sideways and held close to its all-time high. But the past few months are a different story...As you can see from today's chart, copper is getting crushed right now... down 25% in just three months. The 2007 low of $2.40 is now a "line in the sand." If copper violates this level, it's a clear sign from the market that global manufacturing is going to get even weaker than the headlines say...