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Since the notion of higher interest rates became an even greater reality in January, investors have been uneasy about bond-like stocks. This includes utilities, which have bond-like properties. Meaning, if rates are going to go higher then why not trade in your utility stock for lower-risk bonds.
The Utilities SPDR (NYSEArca: XLU) is down 7% since the end of January. Meanwhile, the S&P 500 is up 6%.
But it’s not just the utilities that are taking it on the chin. There’s the Alerian MLP (NYSEArca: AMLP), which is off 4% over the last couple months. The Alerian MLP is yielding nearly 7% and is much less prone to interest rate movements.
Yet there are other forces at work that have also created a buying opportunity for income-seeking investors. Namely, the selloff in oil prices over the last eight months. Despite the fact that revenue generated by many master limited partnerships (MLPs) isn’t tied to the price of oil, the Alerian MLP is down 15% since the summer.
That’s why oil and gas MLPs aren’t just a solid investment in the rising rate environment, but also amidst a selloff of everything oil-related.
Again, for income investors, it could be a great buying opportunity.
When you look back over the last five major rising rate environments, MLPs have posted postitive returns over each of the five periods.
With that, today I’m looking at a couple MLPs that have limited commodity exposure, but are also in the overlooked $10 billion to $20 billion market cap range.
Here are two MLPs for low oil that will work regardless of when interest rates move higher.
MLP for Low Oil No. 1: Enbridge Energy Partners (NYSE: EEP)
Enbridge Energy Partners offers a healthy 6.2% distribution yield. And it goes without saying that it’s still an easy way to capitalize on the oil selloff. That’s because it generates a large part of its revenue from fee-based activities – meaning it collects money on the oil that moves through its pipelines, rather than the price of oil. About 80% of its earnings before interest, taxes, depreciation and amortization (EBITDA) are generated from fee-based activities.
Enbridge Pipeline Partners is a key player in the Bakken and Canadian oil sands. It’s run by its general partner, Canadian pipeline player Enbridge (NYSE: ENB).
Having a major pipelines player, with a $40 billion market cap, as its GP is a positive. Part of the benefit includes implicit financial backing and the ability to source large joint venture growth opportunities.
MLP for Low Oil No. 2: Magellan Midstream Partners (NYSE: MMP)
Next up is Magellan Midstream Partners, which offers a 3.5% distribution yield. Granted, this isn’t as high as Enbridge Energy Partners, but there’s still plenty to like with Magellan. It doesn’t have a general partner, so unitholders collect all the cash flow and it can grow its distribution faster than other MLPs.
It also has a diverse asset base with a central presence in the United States, which allows it to connect the rest of the U.S. with terminals and hubs in the Gulf Coast and Cushing, Okla. It’s also involved in a key Bakken shale, the Saddlehorn pipeline, which is a joint venture with Plains All American Pipeline (NYSE: PAA).
Nobody really knows when interest rates will move higher, or if oil prices will go up or down. MLPs are enticing regardless of interest rates and oil prices, and they provide great income in the meantime.
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