There are lots of theories…
Some analysts reckon stocks will take a rate hike in their stride, as they did in previous tightening cycles. Others – your editor included – worry about what the effect will be for assets currently being priced off of the artificially low “risk free” rate of return on bonds. (A higher risk-free rate makes the present value of future cash flows worth less. Stock prices fall to adjust for that.)
But Jim Nelson, our resident income-investing expert, sees a more specific consequence of rising rates: the potential demise of high-income-paying master limited partnerships.
As Jim told readers of The B&P Briefing, our bonus newsletter for paid-up Bonner & Partners subscribers:
One of the most sought after investments over the last five-plus years has been master limited partnerships – or MLPs. These are tax-advantaged partnerships set up to own and manage various infrastructure assets… usually in the energy industry.
They are tax-advantaged in that they don’t have to pay any corporate income tax, as long as they pay their partners (shareholders) out all of their income. This is why they’re often referred to as “pass-through entities.”
MLPs enjoy this tax-advantaged status because the costs of building the equipment and other assets (such as oil and gas pipelines, refineries and transport ships) are steep… but necessary for global trade.
And because MLPs retain almost no cash after paying their partners, new builds have to be financed through debt. And this is where rising interest rates come into play…
As you may already know, one of the largest publically traded MLPs in America, Kinder Morgan Energy Partners L.P. (NYSE:KMP), just made a big splash by announcing that it is breaking up its partnership.
This is a big deal, because KMP is not only a big income payer, it is also the fourth largest energy company (based on combined enterprise value) in North America. And it has interest in about 80,000 miles of oil and gas pipelines and 180 terminals.
Why would Kinder Morgan willingly give up its tax advantages?
Because of the threat rising interest rates pose. If its debt costs rise, Kinder Morgan’s ability to expand and grow will be severely impaired. That’s the real business effect of rising interest rates.
By breaking up the partnership, its new owner will be able to issue new stock… hold back a portion of earnings… and operate these assets without the restrictions MLPs come with.
Jim reckons Kinder Morgan’s move to break up its KMP, and two other MLPs in the group, “could have ripple effects throughout the MLP landscape… and prove a real game changer for income-focused investors.”
That’s because MLPs have been able to deliver strong yields in a world where yield is hard to come by.
So what are the alternatives for high-yielding income investors in a world of disappearing MLPs?
Jim and Kelly have developed a simple strategy that they believe can potentially double – even triple – your ordinary income… with low risk. Better yet, you can collect these income payouts instantly… and as often as you want.
Jim and Kelly will explain more about this strategy on Saturday in the Weekend Edition of theDiary. They will also have a special invitation to share with Diary readers. So, stay tuned for that.
Further Reading: If you haven’t yet signed up to Bill’s new letter, we will automatically add to his mailing list – at no extra charge – when you buy a copy of his new book, Hormegeddon. According to Bill’s colleague Porter Stansberry, Bill’s book reveals a powerful secret, not just about investing, but about business, relationships and family, too. To pick up your copy… and start receiving The Bill Bonner Letter, read Porter’s review here.