Tags: MLPs Out | REITs In as High Income Market Darlings

MLPs Out, REITs In as High Income Market Darlings

MLPs Out, REITs In as High Income Market Darlings

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Friday, 22 April 2016 07:04 AM Current | Bio | Archive


The world still wants income. Starved for the better part of a decade now, investors have had to invest in stocks, preferred shares, municipal bonds, and other places to get a better return than cash in the bank. A few of those areas, however, are in danger.

The first is master limited partnerships (MLPs). Most MLPs are in the energy space. And that’s a huge reason why they’re out of favor and will remain so. But the MLP structure, with its pass-through depreciation, has proven to be the equivalent of cement shoes when the flood starts in the credit markets.

At the end of 2015, markets started getting skeptical about the level of debts that many energy firms have. MLPs, which have typically enjoyed far greater leverage, have had bigger percentage losses as the credit markets have tightened. The high yields offered by these stocks has similarly dried up as well.

Are there potential winners here? Eventually. While I’m long-term bullish on oil at these prices, we’ll need to see some debt defaults first before the MLP space is safe. Until that happens, expect these companies to remain shells of their former selves.

A better bet on the energy industry is with the common stock of high-quality, best of breed integrated players. The yields there are now favorable for common stocks, and they should grow as oil prices recover. Companies like ConocoPhillips (COP) and ExxonMobil (XOM) fit the bill. If you expect the dollar to weaken, one of the major foreign firms might perform even better, such as Norway’s Statoil (STO).

Buying these companies now, while they’re out of favor, should result in solid income now and great capital gains when oil turns bullish again. At the very least, avoid MLPs.

Not all income plays are in such dire straits, however. Despite the fears in the credit markets at the start of the year, real estate investment trusts (REITs) held up well. In fact, they may have held up too well. Valuations in the sector are at multi-year highs, particularly in well-known and widely-held names like Realty Income (O). Shares took a big dive this week as interest rates ticked up slightly. Buyer beware the big names.

A better bet in the real estate space might be with smaller names that haven’t run up as much in the past few weeks. Firms like Vereit (VER) or Lexington Realty Trust (LXP) have exposure to similar properties as Realty Income but offer better valuations, including higher dividend payments as well. Buyer beware, though. Valuations are still above average.

Remember, REITs and MLPs are best held in tax deferred accounts like an IRA. That’s because these firms typically have higher payouts because part of their distributions are considered a return of capital. That means that over time, selling shares could lead to higher capital gains taxes than suggested by a price change alone.

Secondly, retirement accounts eventually have withdrawal requirements. The yields from these high-income producing assets could meet those requirements over time without having to draw off the account’s capital. If you buy quality common stocks in the energy space now as well as undervalued REITs, you should do very well as long as you aren’t trying to time the market.

Andrew Packer is a Senior Financial Editor with NewsMax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report.

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The world still wants income. Starved for the better part of a decade now, investors have had to invest in stocks, preferred shares, municipal bonds, and other places to get a better return than cash in the bank. A few of those areas, however, are in danger.
MLPs Out, REITs In as High Income Market Darlings
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2016-04-22
Friday, 22 April 2016 07:04 AM
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