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- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
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There are two reasons you need MLPs in your portfolio. They offer a reprieve from the fiscal cliff and they're the purest way to play America's energy boom.
Getting out of the office is a vital part of my job. It is the only way to gain an information edge. It is the only way to learn the truth.
Over the weekend, I journeyed to northern Pennsylvania. I got a close-up look at the state's natural gas boom. I saw the good and the bad -- the riches and the turmoil caused by explosive growth.
Now I am in a hotel room overlooking Denver's popular 16th Street Mall. I am here to join in a conversation with some of the nation's top hedge fund managers and money experts.
The subject... alternative investments.
After lunch yesterday, I had the chance to sit down with two giants of the master limited partnership (MLP) world.
Kenny Feng is the CEO of Alerian -- the top dog when it comes to measuring MLP success. And Bob Sinnott is the boss at Kayne Anderson Capital advisors -- one of the largest MLP investors in the world.
If you're not familiar with the vernacular, MLPs are the government's gift to alternative investors. They offer a unique business structure that bears no corporate tax. It passes the obligation to feed Uncle Sam onto the individual investor.
Given the fiscal cliff we're about to get pushed over... it's a peculiar topic.
For long-term, income-minded investors, there are few things better than MLPs. Again, it's because of that tax structure. For the majority of folks, taxes will never be an issue until they sell.
That's why a recurring theme of our conversation yesterday was the longevity of MLP stakes. These are the assets you want to buy and hold until you die. They are what create generational wealth and a long, steady stream of income.
Pick the right MLP and you will never need to sell. The payout scheme alone will make you rich.
The hottest individual MLP we discussed was Plains All American Pipeline (PAA:NYSE), mostly because Sinott is a director at the company and owns over 35,000 shares.
His stake has made him rich. It was a fact that was hard to ignore...
There is a lot I could say about how to maximize the tax benefits of MLPs, especially as we face a threat to rewrite the rules come Jan. 1. If we go off the cliff, the asset class will soar.
But I'd rather take the time to hit on the idea that makes MLPs so lucrative. After all, a tax advantage only matters if you're making money.
Think of MLPs as mini-monopolies.
There are dozens of companies with pipelines sewn across the nation. But none of them do exactly the same thing.
Unlike a department store that may have a competitor across the street, pipelines are virtually free of competition. Once a pipe is stretched between Tyrone, Pa., and Erath, La... another one will never be built right beside it.
That is also why it is important to do your homework. Not all MLPs are created equal. They all have monopolies... but some are much better than others.
Feng's company runs the industry's benchmark, the Alerian MLP index. In the chart below, we compare Plains All American to its industry brethren using the index.
Over the past eight months, Plains All American has run away from the competition.
Why?
Simple... its processing facilities have taken advantage of the cheap oil flowing out of the Bakken.
As the chart shows, not every MLP has that ability.
In the April issue of Unconventional Wealth, I introduced readers to a unique way to take advantage of the riches hidden in the MLP sector. But instead of a plain-vanilla, follow-the-herd kind of play, we went down our own path.
We went with a strategy that allows us to take advantage of leverage. It's not a lot, but it's enough to magnify our gains potential while still handing us an annual payout worth about 6%... plus a whole lot of appreciation potential.
If my research is right and if things play out the way my connections say they will, MLPs will be the hottest sector of 2013. The industry's potential is about to be realized.
Not only are these companies key to America's energy renaissance and our current lack of infrastructure, the MLP sector is also the optimal way to take advantage of Washington's fiscal jerry-rigging.
It is a good time to be a buyer.
From the Inside,
Aaron
P.S. Pssst... My Local Congressman Clued Me in to an "All-Party Swindle"... Over breakfast he spilled the beans about one famous entrepreneur and the coming boom in natural gas. I did my research and cannot believe my eyes...
Politicos and power brokers are in up to their necks in this affair. One big-name investor alone snapped up 5,547,604 shares of a natural gas specialist with a 'moneymaking patent.' Trust me, you need to get on board before Obama signs H.R. 1380...