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The single worst way to play the U.S. energy boom is with “big oil” stocks like BP, Exxon, and Chevron. During a time when energy production has been soaring, these companies have been missing out.
That’s just one of many reasons that these big three oil stocks are down over the last year…during a time when the stock market and crude oil prices are considerably higher.
But there is a select group of companies in the oil and gas business that are likely to deliver far superior returns…beating big oil stocks, the S&P 500, and every other major market index in the next five years.
These companies are called Master Limited Partnerships, or MLPs, and they’re one of my favorite ways to play the energy boom. One way to invest would be to simply buy the JPMorgan Alerian MLP Index (NYSE: AMJ) – an ETF that owns 30 of the biggest MLPs.
But if your goal is to truly build wealth, there is a far better way to invest. Not all MLPs are created equally, however. While many MLPs may appear attractive, you must be selective.
Today I’m going to tell you about two MLPs that may appear very similar. But their performance over the last five years has been considerably different. Using a simple wealth secret, you’ll learn how to select only the best MLPs for your investment portfolio.
The first company is Boardwalk Pipeline Partners (NYSE: BWP). The Houston-based company with 14,000 miles of pipelines is in the business of transporting, storing and processing natural gas.
The company’s revenues and net income are relatively flat over the last three years. Like most MLPs, Boardwalk throws off some nice operating cash flow of $575 million a year. That was more than enough to cover the $479 million in distributions last year (note – since MLPs are technically partnerships, their dividends are called “distributions”).
Since the business isn’t really growing, Boardwalk hasn’t raised its distributions much in recent years. Payments to shareholders have increased a total of 10% in the last five years.
The second company is MarkWest Energy Partners (NYSE: MWE). Like Boardwalk, MarkWest is in the business of collecting, processing and transporting natural gas in some of the biggest shale plays.
MarkWest’s business is growing nicely. In the last three years, its revenues are up 22% and operating cash flow is up 59%. That growth has allowed the company to aggressively grow its shareholder distributions. Over the last five years, the quarterly distribution has grown by one-third.
The similarities between Boardwalk and MarkWest are considerable. The companies operate in the same sector. They’re about the same size. And five years ago, you could have bought either stock for about $20.
But the performance of these stocks has been quite different…
Boardwalk shares are up a healthy 61% in the last five years. That was enough to beat the S&P 500 index, but was well short of the 92% increase in the MLP index.
Meanwhile, MarkWest crushed them all, with a 216% capital gain over the last half-decade. Of course, shareholders also received considerable dividends along the way too…
The secret to building wealth with MLPs is found not by investing in the highest yielding companies, but by owning the companies that are growing their business by investing in new projects.
Growth MLPs often pay lower yields since they’re reinvesting some of their profits in new pipelines, processing, and storage facilities. But because they’re growing, they can regularly increase their distributions. Over time, share prices are highly correlated with distribution growth – and that makes these MLPs far superior to high-yielding ones.
Today, Boardwalk offers its investors a healthy 7% yield. Compared with the 4.7% yield from MarkWest, an income investor might mistakenly think that Boardwalk is the superior investment.
But MarkWest’s commitment to its shareholders is crystal clear. Since its IPO in 2009, the company has raised its distribution by 12% per year. If that growth continues in the years ahead the stock is likely to deliver a total return of about 17% per year.
MarkWest is a great company worth your consideration, even after its recent run. If you’d like to hear about another of my favorite MLPs, then please join me for my upcoming investing seminar.
Income From Pipelines: the Safest Energy Investment
Most investors hope to “catch a flier” on small, risky exploration companies who usually don’t have a drop of oil in their wells. But in our experience, people don’t build pipelines until they know when and how much oil they’ll pump. Which makes pipeline stocks the least risky investments in the entire energy sector. No pipes – no oil. Click here to read my full write-up on two American pipeline stocks paying big (and growing) dividends.