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Deep Dive: Need income? These investments are great places to park your money right now Deep Dive: Need income? These investments are great places to park your money right now
Pipeline-partnership stocks, which pay outsized dividends, are poised to extend their gains as analysts say demand for oil will strengthen for a third straight... Deep Dive: Need income? These investments are great places to park your money right now


Pipeline-partnership stocks, which pay outsized dividends, are poised to extend their gains as analysts say demand for oil will strengthen for a third straight year.

Two managers of closed-end energy limited partnership funds agree that the partnerships still have room to run even after a big recovery over the past year. That means income-seeking investors are still looking at very attractive dividend yields. (MLP income is actually called “distributions,” not “dividends,” because it is a distribution of capital, which has tax advantages, explained below.)

This chart shows the movement of the Alerian MLP Index












AMZ, +1.26%










 against the price of West Texas crude oil:

FactSet


It’s easy to see that the Alerian MLP Index is super-sensitive to oil-price movements. That’s because pipeline operators’ contracts and cash flow center on the volume of oil, natural gas and refined products they transport. Late in 2014, the MLPs dropped in price much faster than oil did, because investors rightly expected a dramatic slowdown in domestic oil production. The stabilization of oil prices over the past year has helped.

The index has a weighted distribution yield of 7.03%. That’s a fat yield compared with 10-year U.S. Treasury bills












TMUBMUSD10Y, +0.91%










which have a market yield of only 2.51%.

Both fund managers interviewed for this article stressed the importance of remaining committed for the long term if you are an income-seeking investor. As you can see from the chart above, prices are recovering, and committed investors — those who didn’t panic and sell — have continued to receive dividend income while waiting. If you want income from your investments, that needs to be your focus. Otherwise, the daily fluctuation of prices and the long-term price swings will cost you too much sleep.

What lies ahead for MLPs

“We believe the oil market is globally undersupplied at this point,” Matt Sallee, a senior managing director for Tortoise Capital Advisors, said in an interview on March 13.

Sallee said he expected demand for oil to “grow by a million barrels a day this year, [for] the third straight year of robust demand growth,” and for U.S. production not to make up for the demand increase, which would “start to clear global inventories.”

West Texas crude oil for April delivery is now trading below $50 a barrel, but Sallee believes this is a temporary movement and that $50 is the “floor” for the commodity. “This is important for sentiment for MLPs. Fundamentally, it has brought drilling rigs back to work in the U.S.; this means more volume flowing through pipelines,” he said.

“We are kind of getting more in line with a normal market for MLPs,” said Chris Eades, a managing director with ClearBridge Investments, who oversees four closed-end MLP funds, in an interview on March 15. When discussing the oil and MLP price cycle, he said: “This is not the first time this has happened, nor will it be the last time,” and that rising U.S. oil production “should be a tailwind for cash flow generation and distribution,” as we move into 2018.

The worst S&P 500












SPX, +0.84%










 sector this year has been energy, down 9% through March 14, but during the same period, the Alerian MLP index has risen slightly.

Tortoise closed-end MLP funds

When asked about the difference between the two closed-end MLP funds he manages, Sallee said the Tortoise MLP Fund












NTG, +1.65%










is “a bit more focused on natural gas MLPs,” but that over time, it and Tortoise Energy Infrastructure Corp.












TYG, +3.19%










have become similar, “because there are very few pure-play natural gas MLPs anymore.” Both portfolios are made up of “stable,” investment-grade, fee-based long-haul pipeline companies, he said. Importantly, he added that “cash flow on a unit basis for our portfolio was still growing through the entire 2015-2016 cycle” even though MLP stock prices were down “north of 50%.”

The Tortoise MLP Fund has a distribution yield of 8.70%. Here are the fund’s top 10 holdings as of Nov. 30, which made up 63% of the portfolio. We also have included some consensus information from analysts:

Company Ticker Distribution yield Share of portfolio
Plains All American Pipeline LP












PAA, +2.52%









7.12% 13.9%
Energy Transfer Partners LP












ETP, +0.81%









11.78% 13.7%
Enterprise Products Partners LP












EPD, +0.59%









6.02% 12.9%
ONEOK Partners LP












OKS, +2.87%









6.25% 12.1%
Western Gas Partners LP












WES, +1.47%









5.75% 11.4%
Enbridge Energy Partners LP Class A












EEP, +1.73%









13.41% 8.1%
Williams Partners LP












WPZ, +2.98%









8.66% 7.8%
Buckeye Partners LP












BPL, +1.23%









7.32% 7.4%
EQT Midstream Partners LP












EQM, +1.78%









4.41% 7.4%
Sunoco Logistics Parnters LP












SXL, +0.96%









8.66% 7.0%
Sources: Morningstar, FactSet

Tortoise Energy Infrastructure Corp. has a distribution yield of 8.26%. Here are its top 10 holdings as of Nov. 30, which made up 81% of the portfolio:

Company Ticker Distribution yield Share of portfolio
ONEOK Partners LP












OKS, +2.87%









6.25% 14.7%
Plains All American Pipeline LP












PAA, +2.52%









7.12% 14.2%
Magellan Midstream Partners LP












MMP, +1.17%









4.43% 14.0%
Western Gas Partners LP












WES, +1.47%









5.75% 12.9%
Energy Transfer Partners LP












ETP, +0.81%









11.78% 12.7%
Enterprise Products Partners LP












EPD, +0.59%









6.02% 12.6%
Buckeye Partners LP












BPL, +1.23%









7.32% 11.5%
Sunoco Logistics Partners LP












SXL, +0.96%









8.66% 10.0%
EQT Midstream Partners LP












EQM, +1.78%









4.41% 9.4%
Spectra Energy Partners LP












SEP, +1.10%









6.47% 7.6%
Sources: Morningstar, FactSet
ClearBridge Investments

Chris Eades of ClearBridge Investments made clear that with only about 110 publicly traded MLPs, his firm’s four closed-end MLP funds have “a lot of overlap.” But to simplify things, here are short descriptions of their differences:

• ClearBridge American Energy MLP Fund












CBA, +1.59%










 — Focused on natural gas pipelines.

• ClearBridge Energy MLP Fund Inc.












CEM, +2.03%










— “Our core diversified fund, with a little bit of everything,” Eades said.

• ClearBridge Energy MLP Total Return Fund












CTR, +1.38%










— “The more tactical fund, that can pivot and turn to wherever we see the best opportunities,” Eades said.

• ClearBridge Energy MLP Opportunity Fund












EMO, +1.53%










— More focused on oil.

“We are solely focused on transportation, storage and processing assets in the energy space. We do not own oil and production assets,” Eades said. Again, this ties into the reliability of cash flow and distributions of income by the MLPs to investors, no matter what is happening with energy commodity prices and the prices of MLP shares (technically, partnership units).

Eades said his firm’s “plain vanilla strategy” was a conservative one for income-seeking investors, because “these assets are often backed up by long-term contracts [of up to 15 years] and are government-regulated.”

So here are the top 10 holdings for two of the four ClearBridge MLP closed-end funds, as of Jan. 31.

First, the ClearBridge American Energy MLP Fund












CBA, +1.59%










:

Company Ticker Distribution yield Share of portfolio
Enterprise Products Partners LP












EPD, +0.59%









6.02% 7.5%
Genesis Energy LP












GEL, +0.71%









8.43% 5.6%
Buckeye Partners LP












BPL, +1.23%









7.32% 5.5%
Brookfield Infrastructure Partners LP












BIP, +0.91%









4.80% 5.4%
Magellan Midstream Partners LP












MMP, +1.17%









4.43% 5.3%
Energy Transfer Partners LP












ETP, +0.81%









11.78% 5.2%
Cheniere Energy Partners LP












CQP, +0.51%









5.44% 4.4%
ONEOK Energy Partners LP












OKS, +2.87%









6.25% 4.3%
EnLink Midstream Partners LP












ENLK, +0.56%









8.72% 4.3%
Enbridge Energy Partners LP, Class A












EEP, +1.73%









13.41% 4.3%
Sources: Morningstar, FactSet

Here are the top 10 holdings of the Energy MLP Total Return Fund












CTR, +1.38%










:

Company Ticker Distribution yield Share of portfolio
Enterprise Products Partners LP












EPD, +0.59%









6.02% 8.2%
Energy Transfer Partners LP












ETP, +0.81%









11.78% 6.0%
Magellan Midstream Partners LP












MMP, +1.17%









4.43% 5.8%
Buckeye Partners LP












BPL, +1.23%









7.32% 5.3%
Williams Partners LP












WPZ, +2.98%









8.66% 5.0%
Genesis Energy LP












GEL, +0.71%









8.43% 5.0%
Brookfield Infrastructure Partners LP












BIP, +0.91%









4.80% 4.4%
Targa Resources Corp.












TRGP, +3.46%









6.62% 4.4%
ONEOK Partners LP












OKS, +2.87%









6.25% 4.1%
Enbridge Energy Partners LP Class A












EEP, +1.73%









13.41% 3.0%
Sources: Morningstar, FactSet
Advantages of closed-end funds for MLP investors

A closed-end mutual fund has a set number of shares that trade on exchanges. Open-ended mutual funds are much more common, but there can be disadvantages to fund managers because when new money comes in, it has to be invested, even if the fund managers believe the timing is bad.

In addition to the usual diversification, along with active management that can limit risk, closed-end MLP funds have tax advantages. One is ease of preparation of your tax return. If you hold partnership units of a typical energy partnership, you will receive an annual Schedule K-1, which complicates your tax preparation, because, as a partner, your share of the MLP’s expenses, capital gains and income are all allocated and many figures must be entered on your tax return. With a closed-end MLP fund, you receive a much simpler 1099 form.

Another advantage is that the distributions made by the closed-end funds holding MLPs are not really dividends, but capital distributions that are not taxed until you actually sell your closed-end shares.



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