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Investing in master limited partnerships (MLPs) has long been known – and loved – as a reliable income source.
MLPs generate stable cash flow by charging user fees for the transportation of oil, gas, and other fuels through pipelines and other energy infrastructure.
Income generated by investing in MLPs has doubled over the last decade, with distributions increasing at an average rate of 7.6% a year.
What's more, MLP distributions in 2014 are set to rise by 9%, according to Morgan Stanley.
But Leonard Edelstein of Yorkville Capital Management, a firm that focuses on energy MLP exchange-traded funds, thinks that figure might be too conservative thanks to the U.S. shale boom.
The explosive growth of U.S. shale gas and oil production will necessitate an enormous investment on the part of MLPs on infrastructure, estimated at an additional $250 to $350 billion over the next 20 years.
Edelstein told the Financial Times the MLP sector could easily deliver 10% to 15% annual gains over the next several years.
And this leads us to one of the best picks for investing in MLPs to profit from this growth spurt.
One of the Best MLPs to Buy Now
To hunt for the best MLPs to buy, Money Morning's Global Energy Strategist Dr. Kent Moors favors the midstream energy sector, which sits in the sweet spot between upstream (exploration and production) and downstream (refining and distribution). Midstream assets include pipelines, storage facilities, and refineries.
And in the midstream sector, one of the best MLPs to buy is Markwest Energy Partners LP (NYSE: MWE). Markwest, with a dividend yield of 4.87%, is involved in the gathering, processing, and transportation of natural gas.
Markwest is the largest processor of natural gas in the booming Marcellus Shale region, in addition to the Huron/Berea Shale in Appalachia. It has also expanded its presence in other major U.S. natural gas plays like the Woodford and Haynesville shales.
In a recent conference call, Markwest executives stated that their goal was to become the biggest midstream services company in the U.S. natural gas industry.
And so far, management has done a good job – the company's stock is up nearly 37% year to date.
But more gains are on the horizon for Markwest Energy…
On a 5-year performance basis, MLPs (tracked by the Alerian MLP index – AMZ) have outperformed the market (tracked by the S&P 500 Index – SPX) and the global energy sector (measured by the NYSE Amex Oil Index – XOI). Their better performance can be attributed to the US shale revolution, which has boosted MLP stock prices by more than the market’s upward movement ever since the 2008 financial crisis.