MLP Investing

Master Limited Partnerships or MLPs have gained in popularity in this market where yields have fallen to near zero levels.  Income investors no longer have a large assortment of high yielding stocks, bonds, preferreds, or notes to choose from.  The pickings are fairly slim for those seeking 5+% yields.  Right now the only options are in Real Estate Investment Trusts (REITs) and MLPs.  Most preferred stocks with high yields have all been priced well above their par or redemption prices making their effective rate of returns unattractive.

Of course any investment offering a high yield will come with corresponding risk and MLPs are no different.  The biggest risk to investing in a Master Limited Partnership is the depletion of the natural resource being extracted from the earth.  As a part owner you are entitled to a portion of all future profits produced by the MLPs whether it owns oil rigs, pipelines, natural gas fields, or rare earth deposits.  Once the resources being mined or produced are depleted the value of the partnership is essentially zero (there is some salvage value to the equipment).  Depletion values are produced in MLP Annual reports and should be closely examined.  If the estimated value of all remaining resources is less than the market capitalization of the MLP you will struggle to make any money over the lifetime of your investment.  Don’t be lured in by a super high yield because it will eventually fall as the resources are depleted.  Depletion levels are sometimes miscalculated as well which is another significant risk to an investor.

A safer way for an individual investor to get involved with Master Limited Partnerships is through Exchange Traded Funds (ETFs) and or Exchange Traded Notes (ETNs) that specialize in the sector.  Most own 20-30 MLP’s that make up an index.  This added diversity helps mitigate many of the risks discussed above.  The Alerian MLP Index (AMZX) is the most popular of these indexes.

JPMorgan’s Alerian MLP Index ETN (symbol AMJ) was among the first of this type of investment. Demand has soared since its inception and shares have been capped making it very difficult to purchase.  Most brokerages like Fidelity and TD Ameritrade are not able to offer trading in it as a result.  Occasionally additional notes will be offered but they are quickly snatched up.

An alternative to AMJ is the ALPS Alerian MLP ETF (symbol AMLP).  It is similar in net assets and expense ratio but has the benefit of being an ETF rather than an ETN of which there is a limited quantity of shares.  AMLP currently yields around 6%.

Leading economists well understand that the massive debt levels countries have taken on have laid the groundwork for massive inflation over the next 20 years.  Investing in raw materials, rare earth, and hard assets in general may be the only recourse for individuals seeking to preserve their wealth.