Forget Speculative Tech Stocks, These Are the Real Winners

Shah Gilani Aug 08, 2022

Speculative tech stocks feel exciting when markets are rallying, but when inflation rears its head, and interest rates rise, those same tech stocks get absolutely hammered as investors shift their focus away from risk and into stability.

Case in point, Kathie Wood’s flagship exchange-traded fund ARK Innovation ETF (ARKK) lost as much as 78% between February 2021 and May 2022 as investors started to price in inflation and higher rates.

When markets get choppy you want to focus on stable income rather than speculative narratives.

That’s why I focused on Real Estate Investment Trust’s (REIT) last week – and this week I’m introducing you to Master Limited Partnerships (MLP) with healthy yields north of that 5% the S&P 500 averages.

If you’ve never heard of a Master Limited Partnership, it is a business venture in the form of a publicly-traded limited partnership.

To be considered an MLP, the partnership is required to distribute a set amount of cash to investors. Assuming it’s well-managed, that’s where the stable income comes in.

To maintain its pass-through status, at least 90% of the MLP’s income must be qualifying income. This kind of income includes gains realized from the exploration, production, or transportation of natural resources or real estate.

For limited partners, 80% to 90% of the distributions are often tax-deferred. This lets MLPs offer attractive income yields, which are often substantially higher than the average dividend yield of stocks.

My favorite MLPs are pipeline operators because the business model is so straightforward. Exploration companies pull raw materials such as oil or natural gas out of the ground and pay a pipeline company a fixed amount of money to transport and store the oil or natural gas while it makes its way to a refinery or processing facility.

That brings me to Enterprise Products Partners LP (EPD), which operates more than 50,000 miles of natural gas, NGL, crude oil, refined products, and petrochemical pipelines.

In addition to its pipeline operations, EPD has approximately 260 million barrels (MMBbls) of NGL, refined products and crude oil storage capacity, and 14 billion cubic feet (Bcf) of natural gas storage capacity.

Also, it operates 23 natural gas processing plants and 25 NGL and propylene fractionators.

What I really like about EPD is its exposure to natural gas and LNG. Both are much cleaner than crude oil and coal, and are widely expected to play a key role in the transition to cleaner energy sources.

Over the trailing 12-months, EPD has generated $44.66 billion and $4.55 billion in revenue and net income, respectively. That’s a lot of cash that it can distribute to unit holders.

Since its IPO, the company has increased distributions 24 years in a row and returned $45.1 billion of capital to equity investors via LP distributions and unit buybacks.

At the current price, EPD is paying a very healthy 7.26% yield. That’s really attractive considering the yield on US 10-year notes has fallen to 2.87%, as I write this.

If you’re looking for an income play to generate stable income in the face of volatile markets and inflation, consider Enterprise Products Partners LP (EPD).

Make sure to check back in next Monday, and the following Monday’s as well, as I take some time to draw your attention to series on inflation-beating investment ideas.

Until then, have a great week.

Cheers,


Shah

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