One of the top income-producing sectors in the market is getting crushed…
But it’s creating a great opportunity for investors to earn big yields… and potential double-digit gains.[ad#Google Adsense 336×280-IA]Let me explain…
Regular readers are familiar with master limited partnerships (MLPs), which are the “gatekeepers of energy” in the U.S. They own and operate assets used to process, store, and transport oil and gas – like pipelines and storage tanks.
These assets connect the producer with the refiner or the customer.
MLPs don’t pay corporate taxes on their income as long as they pay out 90% of their earnings to their partners (which are like shareholders).
Their big distributions (similar to dividends) make them popular income investments.
But these companies haven’t been immune to the oil and gas selloff. The benchmark Alerian MLP Index is down more than 35% in a little less than a year.
However, the selloff is making these stocks more attractive…
One of the ways we measure the attractiveness of MLPs is to look at the spread (or difference) between U.S. government Treasury bond yields and MLP yields. In this case, we’re subtracting the 10-year U.S. Treasury bond yield from the MLP yield.
The spread between MLPs and 10-year U.S. Treasurys tells us how much extra money we can make by taking on more risk. You see, government bonds are viewed as the safest way to generate income on your investment. If you’re going to put money into other income-paying assets like stocks or MLPs, you want to earn bigger yields to compensate for the increased risk.
The chart below shows the spread between MLPs and 10-year U.S. Treasurys over the past nine years. The average spread between the two during this time was 3.5%. Anything higher than 5.1% is an extreme high… and anything less than 2.0% is an extreme low.
The recent selloff in MLPs has pushed the spread up to 5.4% today. That means MLPs yield 5.4% more than 10-year U.S. Treasurys.
Investors won’t ignore this extra income for long…
The last time we saw the spread hit this extreme was back in September 2012… and the Alerian MLP Index went on to soar 51% in just more than two years as yield-hungry investors piled into the sector.
In 2008, the spread between MLPs and 10-year U.S. Treasurys hit around 10%… and the Alerian MLP Index rocketed 155% in less than 18 months.
And big yields aren’t the only reason I believe MLPs are headed higher…
As we’ve shown you in these pages before, the U.S. is producing massive amounts of oil and gas in places like North Dakota, Pennsylvania, Colorado, and Texas. Annual U.S. crude-oil production is up more than 70% since 2008. Annual gas production is up 30% over the same period. And production is going to keep soaring.
To get all of this oil and gas to refiners and customers, the U.S. needs more of the assets MLPs own and operate – like pipelines and storage tanks. This will be a huge tailwind for MLPs over the next few years.
MLPs also have minimal exposure to oil and gas prices. They collect the majority of their revenues from fee-based contracts. In short, they just collect fees from processing, transporting, and storing oil and gas. This makes their distributions more reliable. And it makes them an attractive investment with low oil prices right now.
To sum up, MLPs offer big yields. They’ll also be big beneficiaries of America’s ongoing surge in oil and gas production – even with low oil and gas prices.
The MLP sector is still falling today. So I don’t recommend buying right now. But this trend won’t last long. And based on history, we could see double-digit gains once an uptrend starts.
The two easiest ways to invest in the sector are through the JPMorgan Alerian MLP Fund (AMJ) and the Alerian MLP Fund (AMLP). I recommend adding these funds to your “watch list.”
Source: Growth Stock Wire