How to Safely Hunt Down Yield in Energy

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How to Safely Hunt Down Yield in Energy

The search for yield isn’t getting any easier. And that won’t change as long as global economies continue to demonstrate anemic growth.

The United States is growing at about 2% – and that’s the fastest of the developed nations. Indeed, Europe is in worse shape, and interest rates there are being forced lower by the EU banking authorities.

Granted, interest rates in the United States will eventually rise, but not until mid to late 2015. Even then, we’re not going to see a massive increase.

This leaves yield-hungry investors in a jam . . .

When rates tick up, you can expect them to top out at 3.5% or 4% on the 10-year Treasury bond. And that’s still nowhere close to what investors need from fixed income to make ends meet.

Here’s an easy way to close the gap . . .

The Beauty of MLPs

One of the most attractive sources of yield over the past five years has been MLPs, or master limited partnerships.

These entities, usually found in the energy sector, operate as dividend machines. They pay out hefty amounts each quarter, based on the financial performance of the underlying asset.

The problem is, in their pursuit of yield, many investors are jumping into MLPs blindly.

Can you blame them?

When your bank or the U.S. government is paying you a pittance – and you see an MLP that’s shelling out 14% – it’s understandable that your gut reaction is to buy as much of the MLP as possible and chase the yield.

There’s much more to the story than meets the eye, though.

MLP Dangers Exposed

When an MLP is sporting such high yields, one of two things is likely going on . . .

Either it’s such a high payout ratio that the dividend isn’t sustainable, or the payments are coming from capital instead of earnings.

It really is that simple.

Not all of these companies are disclosing all you need to know about their underlying performance or structure.

Some of these companies are basically selling shares to generate the capital required to pay dividends.

In fact, last year, the entire sector got slammed as a result. MLPs like Linn Energy (LINE) saw shares get decimated by 10% in one session!

Don’t fret, though. There’s a better way to play the energy boom – and get a big yield at the same time.

More importantly, you won’t be exposed to the weaknesses of individual companies that may put your entire portfolio at risk, should some type of irregularity occur.

The vehicle of choice is the Alerian MLP ETF (AMLP). It’s essentially a mutual fund of MLPs in the energy sector.

With a juicy yield approaching 6%, this MLP consists of 25 companies, primarily in the “toll collection” sector, more commonly known as pipelines and storage.

I know, owning an MLP ETF may not be the sexiest way to collect yields in the energy sector. But it is one of the safer ways to boost your fixed income energy allocation.

And “the chase” continues,

Karim Rahemtulla

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