Friday, May 29, 2009

Volume 3, Issue #44

Also in Today's Issue...

They say a picture is worth a thousand words. Let's see if they're right:

The top line on our chart shows the performance of an oil and gas master limited partnership (MLP) that owns a network of pipelines and other hardware necessary to move petroleum products throughout the United States. The bottom line shows the S&P 500, basically flatlining.

As you can see, the MLPS have done extremely well this year, about 44 percentage points ahead of the anemic S&P 500 Index. The picture tells the MLP story, which can be summed up in one word: Safety. MLPs have delivered strong gains as the rest of the market struggled because almost nothing can interrupt their business.

That's why MLPs have been able to not only deliver these astounding returns, but also to accomplish another amazing feat: They've kept paying their dividends. In fact, the company in the chart, like most MLPs, has a strong double-digit payout, one that's roughly three times the market average. Other MLPs that my colleague Carla Pasternak holds in her High-Yield Investing portfolio have done even better.

So what is an MLP, besides being yet another acronym in the alphabet soup that is Wall Street? These are special entities set up to finance and own an asset and earn revenue from its business. And though that business -- oil -- is one of the most volatile on the plant, MLPs are among the most stable investments you can buy. In fact, as you can see, they're something investors run to when the rest of the market looks too risky.

The reason for this is the MLP business model, which looks a lot more like a toll bridge than an oil derrick. Oil, as you know, fell from a high of $147 a barrel down to the low $30 range. Great news for drivers but an apocalypse for some investors.

But even that dramatic drop didn't change how much it costs to pump a barrel of oil from Point A to Point B. That rate stays pretty steady, regardless of the value of what's being pushed through the pipeline. Or, to use our other analogy, the bridge toll for a $375,000 Rolls-Royce Phantom is the same two dollars it is for a $2,750 Kia Spectra. A car is a car, just like a barrel of crude is a barrel of crude, whether it costs $150 or $50.

Now, while it's true that recession reduces crude use in emerging markets, where driving is a luxury, it's not as pronounced in developed countries where driving is essential.

As you can see from the chart, there hasn't been a precipitous falloff in crude shipments. A slight reduction some months, yes, but no crash.

What this means practically is simply this: The nation uses a lot of oil in good times and bad, and the MLPs that own the pipelines that move oil do well throughout the upswings and downturns of the economic cycle. Your dividend checks are backed up by the nation's insatiable thirst for oil for our cars and natural gas to heat our homes. That's one of the reasons that the MLP shown in the top chart has increased its revenues +58.5% since 2005.

What does it mean to have a strong dividend payer in your portfolio? It means one thing: Safety. You don't have to worry about what's going on in the market when you've got tangible results. For conservative investors, there's simply nothing safer than a cash return. And MLPs throw off cash like no other asset -- that's their entire reason for existence!

If that sounds like it's right up your alley, then there's another group of securities that you should be aware of. They pay yields of 9.5%, 18.5%, and even 19.4%. Thanks to this group of securities we're locking in annual paychecks of $16,300, $19,900, and even $28,900 for every $100,000 we invest. Go here to read all about them.

Many Happy Returns

--Andy Obermueller
StreetAuthority Investment Analyst

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