The Best MLPs To Buy Now

Many MLPs are offering distribution yields of close to 10%. The Alerian MLP ETF

(NYSEARCA:AMLP) is paying an 8.3% yield.

But the Alerian MLP has fallen nearly 20% for the year, compared to the S&P 500’s 2% loss.

Factoring in dividends, the S&P is almost break-even, while the Alerian MLP is still off more

than 10%.

Even consolidation and buyouts can’t save you. Shares of Williams

Companies (NYSE:WMB) are down 23% over the last three months, despite a buyout

from Energy Transfer Equity (NYSE: ETE). This deal is getting done at a much lower price

than previously expected, putting a damper on the entire MLP space.

The former stability that MLPs offered is all but gone and volatility could be commonplace for

MLP investors. So, again, even with MLPs offering illustrious distribution yields after the sell-

off, is that really a reason to buy?

You have to be increasingly selective and be ready to take some volatility.

To start, the focus should be on midstream MLPs that run storage and pipeline businesses,

which have the most stable cash flows in the industry. They don’t make any money from the

price of oil; rather, they collect from the amount of oil they move. And stable cash flows are a

must right now to ensure companies can cover distribution payments.

With all that, here are the two best MLPs to own now:

No. 1 MLP Worth Owning: Enterprise Products Partners (NYSE: EPD)

Enterprise Products is a transporter and storer of natural gas and natural gas liquids. It offers a

solid 5.4% distribution yield. It is well positioned in the Gulf Coast and has several billion-

dollar projects in the works. The MLP has a partnership with almost every ethylene cracker in

the Gulf.

Being a player in the natural gas market is a positive for Enterprise, where it can take advantage

of the low cost natural gas in the U.S. and export it to international markets. Other factors

keeping Enterprise Products’ cash flow growing is the demand for converting olefins for use

in manufacturing.

Magellan Midstream has nearly 10,000 miles of pipelines and pays a 4.3% distribution yield.

The beauty of Magellan is that most of its cash flow is generated from fee-based contracts. All

in all, low-risk storage and transportation businesses make up over 85% of its profits. In

addition, Magellan holds many long-term contracts.

The other 15% of its business is butane bleeding, which is hedged to limit the impacts of

gasoline price movements. Its balance sheet remains strong, with one of the lowest costs of

capital in the business. Still, Magellan shares are down 17% year-to-date.

The sell-off for certain MLPs is overdone. It will be the MLPs with strong distribution growth

and management teams that have been through the boom and bust cycles before that will come

out on top.

And lower commodity prices can actually be a tailwind for companies that are properly

positioned. Lower oil and gas prices means greater demand for refined products. That means

more volume passing through the pipelines of Magellan and Enterprise Products.