In Master Limited Partnerships (MLPs), an asset class by definition, just like many REITs (Real Estate Investment Trusts), a certain portion of the profits have to be paid back to investors through dividends and distributions.
What has made the MLP so unique is, unlike a bond, which has a fixed yield, income from an MLP might increase.
Well-managed MLPs aren't just looking to generate steady income, their goal is to grow distributions for investors.
"When you look at MLPs, they are really total return vehicles over time. The upfront yield right now may be 6 percent, but the kicker is the fact that we expect at Morgan Stanley another 5.5 percent in distribution growth in 2011," Stephen Maresca, executive director of Morgan Stanley, told CNBC's "The Strategy Session" on Monday.
"When you look over ten years, MLP distribution growth has been more than three times the CPI Index (Consumer Price Index) as a measure of inflation. So you're beating inflation and you're getting good total returns, so we do think it can continue," Maresca said.
He added, "We're seeing investors come in—mutual funds, new dedicated pension allocations—these are longer term players. I think they look at the critical energy infrastructure angle that the MLP's play in the U.S. economy and they want to be apart of it."
For long distribution growth, Maresca recommends two MLPs:
- Williams Partners: "It's our best large-cap idea. The upfront yield is 6 percent, but we think you're gonna get over 8 percent in distribution growth in 2011, largely to due with there unique position in the Marcellus Shale—where now Chevron is a part of it," Maresca said.
- Western Gas Partners : "Anadarko is the parent. We think there will be over $500 million of assets purchases by Anadarkothis year, and we see distribution growth in 2011 for Western of 12 percent," he said.
US energy infrastructure assets in MLPs is now about 40 percent, and over the next five years that will grow, Maresca said.
"Corporations are looking at the MLP tool as a tax advantage way to put some of there assets in there to help get cash up for them to grow there own separate businesses," he said.
"It was created as a policy tool in the '80s for energy infrastructure, it's a low tax advantage vehicle, low cost of equity, so people use it to put pipelines and storage terminals in there to help grow," Maresca said.
"We also think you're gonna see movement into more oil, given where oil prices are right now," he concluded.
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