A Good Time to Buy MLPs

A modest tapering of the Fed's stimulus could come next month and produce a temporary rally in a variety of income vehicles writes MoneyShow's Jim Jubak, also of Jubak's Picks.

I think this is a good time to be buying—selectively—income-producing MLPs (master limited partnerships). I'm less enthusiastic about REITs (real estate investment trusts): There are good buys in the sector, but you have to be even more selective than with MLPs.

I'm going to explain how you go about being selective in buying MLPs and REITs.

On September 18, I think the Federal Reserve will begin to reduce its monthly purchases of Treasury and mortgage-backed securities. About 65% of economists surveyed by Bloomberg on Aug. 21 agree with that opinion.

The consensus is that the taper will begin with a reduction in the $85 billion in monthly purchases to something like $75 billion or $70 billion. My suspicion is that a reduction of that magnitude won't have much effect on the financial markets. In fact, my suspicion is that the reaction will be "That's what we were worried about?" and that we'll get, at least, a temporary rally in bonds, dividend-paying stocks, and other income vehicles. (Temporary. Remember that the markets also have to cope with the threat of a government shutdown in September over the budget, and a potential debt ceiling crisis in October.)

If my suspicion is correct, right now is a good time to pick up shares of dividend-paying companies and units of MLPs and REITs. After the drubbing dealt out to income assets in the last month, it's relatively easy to find dividend stocks that pay 5.24%, as Teco Energy (TE) did at the August 23 close or MLPs paying 5.72%, as ONEOK Partners (OKS) did on that date.

But I'd like to have more than suspicion in my corner before buying anything in the income sector now. Yes, it stands to reason that a taper to $75 billion from $85 billion won't be a big deal, and that income assets are now oversold, but I wouldn't mind buttressing that suspicion with as many other advantages I can find.

And, fortunately, I can find two that suggest where the biggest and safest bargains lie in the income sector.

First, I'd like to see income assets where the price has been driven downward by more than just fear of the taper. For example, part of the reason I recently added Teco Energy to my dividend-income portfolio is that the company's coal subsidiary has been hit hard by falling coal demand and lower prices, providing a second negative trend in addition to the more general fear of a Fed taper.

Second, I'm looking for stocks with a second or third negative trend playing against them if, and only if, I think that trend is likely to reverse soon. So I looked to buy Teco Energy because the company is planning to sell its Teco Coal unit. That sale would remove one of the problems depressing Teco Energy shares and give the stock a very good chance of rising, even if my suspicion on the market reaction to a taper turns out to be wrong or overstated.

In other words, I'm looking for income assets with their own specific reasons for appreciation, rather than just trusting to a hope that a rising tide will lift all boats.

I think the natural-gas boom in the United States has made for especially attractive hunting in the energy MLP sector. And within that sector, I'd target MLP pipeline companies with big exposure to natural gas liquids.

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