Tax Advantaged HIgh Yield MLPs (from WSJ)

HEARD ON THE STREET OCTOBER 26, 2009
The Investments for These Taxing Times

By LIAM DENNING

Worried about a depreciating dollar, rising taxes and stingy investment yields?

Try Master Limited Partnerships. MLPs are listed partnerships that typically invest in hard assets like oil and natural-gas pipelines. They pay no corporate tax and offer investors high cash distributions, most of which is tax-deferred.
And their recent performance is hard to beat. Since the collapse of Lehman Brothers, the Alerian MLP Index has actually made a slight gain, compared with losses for the S&P 500 and the wider energy sector. This is even more impressive when you consider the MLP sector's Achilles' heel. MLPs paid out an average of 72% of their funds from operations after interest charges in the second quarter, according to CreditSights. That doesn't leave much money to invest in growth, leaving MLPs reliant on liquid capital markets -- precisely what was missing this past year.

The thaw in financial markets eases this pressure, as does the likelihood that the energy MLP sector's current capital expenditure cycle likely peaked last year.

All that previous infrastructure construction tees up future growth. Yves Siegel of Credit Suisse estimates the sector is currently yielding 7.8% and should boost distributions by 5% this year, offering juicy total returns in the range of 8%-12%.

The most attractive prospects are MLPs like Boardwalk Energy Partners that are heavily weighted to natural-gas transportation assets. These should benefit from long-term growth in demand for the fuel. And since their income is tied more to fees for pipeline capacity than throughput, they're insulated from the current weakness in natural-gas demand. With interest rates on the floor, you could do worse than seek refuge in a pipe.

Write to Liam Denning at liam.denning@wsj.com

Printed in The Wall Street Journal, page C8