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Stocks & Bonds

4 Great Picks to Earn 6% - 8% From Master Limited Partnerships

Pipeline companies pump profits from moving America's rising oil production.

Illustration by Benedetto Cristofani

With domestic oil production rising to about 9 million barrels per day—up from 8.4 million in mid 2016—MLPs are thriving once again. The firms operate pipelines, storage terminals and other types of infrastructure for the oil-and-gas industry. MLPs distribute most of their cash flow, after expenses, and as they build more pipes to meet demand, they should be able to increase distributions. “We’re back in an environment in which the industry will grow,” says Chris Eades, who manages funds that buy MLPs for ClearBridge Investments.

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Risks to your money. The stocks could slide if oil prices tumble and producers scale back on drilling (reducing demand for pipes, storage and processing plants). Steeper financing costs for new projects could hurt the business. If you buy individual MLPs, you’ll have to deal with complex K-1 tax forms.

How to invest. Among individual stocks, Eades recommends three firms: Nustar Energy (NS, $52, 8.4%), Enable Midstream Partners (ENBL, $17, 7.6%) and Enterprise Products Partners (EPD, $28, 6.0%). The first two MLPs should benefit from rising oil production in the shale regions of Texas and Oklahoma, Eades says. Enterprise is one of the largest and most diversified MLPs, with a solid balance sheet and projects in the works that should lead to steadily higher distributions. “If you want to own one MLP stock, this is it,” says Eades. If you’d rather not pick your own securities, take a look at Alerian MLP ETF (AMLP, $13, 6.3%). It recently held 25 stocks, emphasizing the biggest MLPs. Investors in the ETF receive standard 1099 tax forms rather than K-1s. One drawback, however: The ETF doesn’t yield as much as many individual MLPs, in part because of relatively high annual fees of 0.85%.

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