This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Looking for Income Growth in 2014? Check These MLPs

NEW YORK (TheStreet) -- The market volatility that started this year has led investors to seek out safe havens and has led to a retreat in interest rates. The 10-year Treasury is 40 basis points off its high of 3% reached in December.

The drop in rates has resulted in a strong bid for higher yielding equity investments such as real estate investment trusts, utilities and master limited partnerships, all of which gained in January while the S&P 500 dropped 3.5%.

If you believe this recent pullback in rates is a short-term blip, income-oriented equity investors need to be particularly selective in their stock picking and focus on distribution growth.

Distribution growth offers three primary benefits: (1) preserves purchasing power which functions as a hedge against inflation, (2) offers protection against rising rates and (3) drives future price appreciation.

Many investors are aware of the high current yield offered by master limited partnerships, which generally fall into the 5% to 8% area. However, fewer pay appropriate attention to future distribution growth and what it can mean to their investments over time.

Let us look at a simple example to illustrate the power of distribution growth:

Vanguard Natural Resources LP (VNR - Get Report) is a successful exploration and production (upstream) MLP that offers a current annualized yield of nearly 8.5%, while Atlas Energy LP (ATLS - Get Report) is a general partner MLP with an indicated yield of 4.0%.

Given the need for current income, an income investor might choose to invest in VNR. In this scenario, the income investor has neglected forward growth rates and its effect on price appreciation

VNR has grown its payout at an annual rate of about 4% over the last three years and is projected to grow at a rate closer to 2% going forward. ATLS, meanwhile, has grown its distribution at an exponential rate in recent years and analysts estimate 20% distribution growth for the next three years.

All else being equal, the income stream of a $100 investment in VNR (at 4% growth per year) vs. ATLS (at 20% growth per year) is equal after five years.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
ATLS $8.74 -1.70%
OKE $44.73 -1.10%
VNR $16.46 -2.80%
YMLI $20.58 -0.24%
AAPL $128.72 -0.49%

Markets

DOW 18,065.78 -137.59 -0.76%
S&P 500 2,095.95 -11.83 -0.56%
NASDAQ 4,962.92 -16.9810 -0.34%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs