With oil turning a corner, it might be time to trade in your REITs for higher-yielding MLPs.
There are a couple things working against the previously wildly popular real estate investment trusts (REITs).
One is the threat of rising interest rates, while the other looks to be a rebound in oil prices. With rising oil prices, the threat of prolonged production cuts might be overblown. Thus, yield-seeking investors are finding that they can do better with master limited partnerships (MLPs). In a lot of cases, with MLPs you’ll get a yield that’s double what many REITs are offering.
With this, some of the major REITs are down more than 5% over the last month, including Ventas Inc. (NYSE: VTR), Health Care REIT (NYSE: HCN) and HCP Inc. (NYSE: HCP).
And over the last month, the Vanguard REIT Index Fund (NYSEArca: VNQ) has fallen 2.5% and is now negative for the year. The S&P 500 has also been resetting a bit over the last month.
However, one place that’s looking strong for income starved investors is MLPs. Since oil bottomed in mid-March, the Alerian MLP (NYSEArca: AMLP) has been on a tear, up nearly 5%. Plus, this ETF offers a 6.7% distribution yield, compared to the 3.7% yield for the Vanguard REIT.
With the market finding favor with MLPs again, let’s take a look at the top three for the current energy environment:
No. 1 High-Yield MLP: Oneok Partners LP (NYSE: OKS)
Oneok is offering a very enticing 8.2% distribution yield and has upped that distribution for nine straight years. It’s heavily involved in natural gas transportation as well, while also giving investors exposure to the gas gathering and processing market.
Oneok has a large network of natural gas gathering and transportation assets. It also owns 50% of Northern Board, which gives it a strong presence in the long-haul natural gas market from Canada to Chicago. But it’s also been investing heavily in the Bakken shale in an effort to link together its natural gas liquid transportation and gas gathering businesses. Ultimately, this will further widen Oneok’s moat in the midstream natural gas business.
No. 2 High-Yield MLP: Buckeye Partners LP (NYSE: BPL)
Buckeye Partners is offering a 5.2% distribution yield and has upped its yield for 12 straight years. Its distribution coverage (the amount of cash flow to cover its distribution) is strong, with a coverage ratio of nearly 120%.
One of the unique angles to Buckeye Partners is its storage facility, which has been doing well as producers choose to store their production in an effort to wait out low oil prices. So its utilization rates are on the rise, as is storage pricing. Meanwhile, its transport business is still going strong with 6,000 miles of pipelines.
No. 3 High-Yield MLP: Spectra Energy Partners LP (NYSE: SEP)
Spectra Energy is offering the lowest distribution yield of our three MLPs, coming in at 4.4%. It has upped its distribution for eight consecutive years.
One of the real beauties of Spectra Energy Partners is the fact that it has no direct exposure to commodity prices and generates nearly 100% of its income from long-term contracts.
It’s also a major player in natural gas transportation, where it has a presence in the gas-heavy Marcellus Shale. Its prized asset is the Texas Eastern Transmission, which is a pipeline network that has the capacity to move over 10% of the gas consumption in the U.S. from the Gulf of Mexico to New York. Ultimately, Spectra has a wide network of interconnected gas pipelines that connect Texas with many demand sources.
MLPs have remained an interesting investment throughout the collapse in oil prices, due to their high yields and stable cash flows. And with oil prices turning a corner, the market might finally be ready to realize the benefits of MLPs.
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