Lock in 12% Dividend Yields by Partnering with Major Oil Companies
Wednesday, February 18, 2008
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Lock in 12% Dividend Yields by Partnering with Major Oil Companies
-- By Carla Pasternak

Ever wonder what it would be like to be a partner in a major oil business? Just think of the stable cash flows you could earn from the combination of $90 per barrel crude, billions in profits and the world's insatiable thirst for energy. The idea alone is enough to excite even the most cautious investor.  (Full Story Below)

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    Lock in 12% Dividend Yields by Partnering with Major Oil Companies

     Ever wonder what it would be like to be a partner in a major oil business? Just think of the stable cash flows you could earn from the combination of $90 per barrel crude and the world's insatiable thirst for energy. The idea alone is enough to excite even the most cautious investor.

     But is it possible for small investors to actually partner with a major oil conglomerate?

     The answer is "YES."  In fact, it's easier than ever to join forces with a major energy firm -- thousands of individuals have already done so by investing in master limited partnerships (MLPs). These investors are earning solid yields of up to 12% while also enjoying significant capital gains -- without having to do anything other than watch the income roll in.

     Not surprisingly, this tremendous profit potential has ignited strong growth in the MLP market. In the mid-1990s, master limited partnerships totaled just $2 billion in market capitalization. Today, there are literally dozens of actively traded MLPs, and they boast a total market cap of about $100 billion. But even though their popularity has soared, income investors can still find attractively valued MLPs with rich yields -- if they know where to look.

     My name is Carla Pasternak. I'm the editor of High-Yield Investing, the most widely read income-oriented newsletter in the U.S. In today's volatile markets, I've become a cautious investor, but I'm still greedy when it comes to searching for securities with enormous dividend yields. As long as we can keep the risk levels low, I think it's a smart move to capture the double-digit yields that some MLPs are offering us right now.

     I remember when Rich Kinder launched one of the earliest MLPs more than a decade ago. Today, Kinder Morgan Energy Partners (NYSE: KMP) is a $10 billion business, operating over 25,000 miles of pipeline and hundreds of terminals throughout the U.S. I've been watching MLPs like Kinder Morgan for a long time, and from what I've observed, I believe they provide some of the best income opportunities on the market today.

     Understanding MLPs

     To understand why master limited partnerships have become so popular, I want to give you a better sense of what they are.

     An MLP is a publicly-traded limited partnership. The term "publicly-traded" is important -- this is not an obscure asset class enjoyed only by a select cadre of wealthy partners. Instead, MLPs are widely available to individual investors like you and me. Shares of ownership (referred to as "units") in an MLP can be bought and sold on the major exchanges just as easily as common stocks.

     Although they operate in a wide variety of industries, most MLPs are involved in the energy sector, where they own and manage the pipelines and infrastructure used to transport petroleum and natural gas around the United States. With energy demand continuing to rise at a steady clip each and every year, that's a great business to be in.

     Thanks to steady demand for these essential commodities, MLPs generate boatloads of cash, which they then distribute to their partners. Even better yet, due to their unique corporate structure, MLPs are not subject to corporate income taxes -- leaving even more cash available for investors.

     MLPs Double the Performance of the Overall Market

     Why have MLPs gained in popularity so quickly? It may have something to do with their enticing yields. Or maybe it's their exceptional track record for raising dividends an average of +8%-9% a year for the past ten years that has endeared them to income investors. Of course, it could also be the solid total returns they've delivered over the past decade.

     Master limited partnerships have steadily churned out double-digit gains despite volatile commodity prices. In 2007, MLPs delivered average total returns of +12.7%, handily beating the S&P 500's total return of +5.5%. In fact, as you can see in my chart, this group of about five dozen securities, represented by the benchmark Alerian MLP Index, has handily outperformed the S&P for the past several years.

     Safe Yields and Above-Average Growth -- A Rare Mix

     Like real estate investment trusts (REITs), MLPs pay out most of their cash flow to shareholders. As a result, the group carries an average yield of about 6.5% -- more than three times the puny sub-2% yield offered by the average stock in the S&P 500 Index. And many individual MLPs offer even greater yields -- up to 12% or more.

     But again, their healthy yields are just part of the attraction. Instead, it's the rare mix of safety and growth that makes MLPs a must-have asset class for your income portfolio.

     Most MLPs process and ship oil and gas, so it's only natural to think they would be affected by volatile commodity prices. But the reality is far different. Their cash flows depend primarily on the volume of products shipped through their pipelines -- not on commodity prices. As a result, they offer some of the most stable distributions around. 

     MLPs that own interstate pipelines enjoy even safer revenue thanks to government-regulated rates. The rates they can charge may vary depending on where their pipelines are located, but one thing is for sure -- their rates are not pegged to commodity prices. For example, Kinder Morgan, which operates one of the longest petroleum products pipeline systems in the U.S., gets the same amount to ship a barrel of gasoline whether oil prices are $35 or $120 a barrel. 

     Furthermore, U.S. energy demand is expected to grow at a steady +1% annual clip for the next 20 years, just as it has over the past 20 years. As a result, energy MLPs should continue to see plenty of demand for their services, allowing them to provide investors with a growing income stream for years to come.

     Growing Institutional Interest

     You know an industry is getting hot when major financial institutions start piling in. For years, MLPs were owned almost exclusively by individual investors. Institutional investors held less than 5% of these securities.

     Now that's changing, and institutions are zeroing in on this once overlooked sector. A few years ago, mutual funds were given the green light to hold more MLPs in their portfolios. Congress passed a law allowing funds to hold up to 25% of their assets in MLPs, whereas previously MLPs could account for no more than 10% of their assets. Today, more and more institutions are loading up on MLPs, and several closed-end funds have been created that focus solely on lucrative master limited partnerships.

     Future Outlook 

     The long-term picture for MLPs looks brighter than ever. Demand for energy is unlikely to slow in the U.S. anytime soon, and many investors are looking for a stable place to invest while the current market turmoil ravishes portfolios here and abroad. Combined, these factors spell high times for MLPs.

     If you want to profit from this booming sector, then you should take a look at my newly updated report -- Pipelines of Profits. (Already a paid subscriber? Click here to read this report now.) This report brings you everything you need to know about master limited partnerships, including a handy list of 50 of the largest MLPs and their yields (up to 12%!). And for those investors looking for even more guidance, I've also included in-depth profiles of three partnerships that offer the greatest potential for both capital gains and dividends in the coming months and years.

     Of course, this exclusive report isn't available to just anyone. In order to access it, you must be a subscriber to my premium income service -- High-Yield Investing. Subscribe now and you'll also receive up to five additional research reports, as well as my monthly newsletter, and my "High-Yield Stock of the Month" -- a closed-end fund with a mouth-watering yield of 22.1%.

     So for those investors who realize income-producing investments are the surest way to wealth, I invite you to try my premium service -- High-Yield Investing. Visit this link to learn more.

     Thanks for joining me on my search for today's highest-yielding securities!



-- Carla Pasternak
Co-Editor
Global Dividend Opportunities
GlobalDividends.com
839-K Quince Orchard Blvd. 
Gaithersburg, MD 20878-1614

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