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5 Energy MLPs Poised to Pop

Stocks in this article: BKEP EVEP PAA EPD DPM XOM

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Cunnane, meanwhile, says that Plains All American (PAA), Enterprise Products (EPD) and DCP Midstream (DPM) combine reasonable yield with very good positioning in the expanding U.S. infrastructure landscape. The three are engaged in slightly different parts of the midstream energy space.

Wall Street is bullish about Plains All American, with 13 of the 16 analysts covering the stock at either a strong buy (6) or buy (7), and the 12-month median price target sitting at $85 vs. Wednesday's close at $78.37.

The sell side also likes Enterprise Products with 19 of the 22 analysts covering the shares at either a strong buy (10) or buy (9), and the 12-month median price target at $55 vs. Wednesday's close at $50.67.

The view of DCP Midstream is split with six of the 12 analysts covering the stock at either a strong buy (3) or buy (3), and the 12-month median price target sitting at $52 vs. Wednesday's close at $45.45.

Spears thinks that MLPs as a sector should provide a mid-teen return over the course of 2012. For diversified exposure to the sector, he recommends Swank's Cushing MLP Premier Fund.

Famco's Cunnane sees low double-digit returns from his MLP recommendations. Generally, he thinks the MLP universe as a whole should grow at a slightly over 5% a year rate over the next five years and offer yields above 5%. The corresponding growth metrics for Plains, Enterprise and DCP should be several percentage points higher than that of the average MLP. The three now have respective forward annual dividend yields of 5.2%, 4.9% and 5.5%.

Despite their many benefits, the MLPs issue a K-1 tax form that complicates the already complicated tax filing process, over the years discouraging investors from pursuing the opportunities they present. But it's now possible to get around this problem by investing in these cash machines through exchange-traded funds, exchange-traded notes and mutual funds. With these, investors would get a standard 1099 form instead.

Cunnane says that investors should make sure to check whether they're giving up anything for these diversified investment vehicles, as some of them are levered and riskier and have to pay taxes at the fund level.

Also, MLPs, being far less liquid than energy giants such as Exxon (XOM), can exhibit volatility levels between that of equities and fixed-income products, as they have characteristics of both.

Advisors say as long as the fundamentals remain solid and the company is still delivering cash, investors shouldn't worry too much about the volatility.

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