Christmas Comes Early for Income Investors

 | Nov 16, 2012 | 10:30 AM EST
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The market continued to sink post-election on Thursday as confidence wanes that both sides can come to agreement quickly to deal with the fiscal cliff. Stocks that had huge run-ups in the past year and high-dividend stocks have led the decline as investors sell to avoid higher capital gains and dividend taxes in 2013. Investors are justifiably rattled, as the market's fate seems to be in the hands of politicians.

But this pull back provides opportunities. I particularly like the position of income investors who were prudent or fortunate enough to keep plenty of cash on hand. Many high quality income plays are selling 10%, 15% or even 20% lower than they were two weeks ago. For yield players, it is as if Christmas came early. This is especially true if you hold income investments in tax-deferred vehicles since the higher dividend taxes on the way are not relevant.

As I touched on in Thursday's column, I continue to favor some of the high-yielding master limited partnerships that are building and maintaining the nation's rapidly growing domestic energy infrastructure. First, distributions from MLPs are considered return of capital, so they should be unaffected by increased dividend taxes. In addition, there are no current plans to change the tax treatment of these vehicles.

The amazing increases in domestic oil & natural gas production have been one of few bright economic accomplishments over the last six to eight years. I believe this expansion will continue and the U.S. is well on its way to becoming energy independent. There are numerous opportunities to benefit from this expansion with investments that offer high yield and solid growth. Another energy MLP I recently picked up on sale after it fell some 20% because of a disappointing earnings report and the overall market sell-off is Atlas Pipeline Partners (APL). It gathers and processes natural gas through 9100 miles of natural gas gatherings systems and seven natural gas processing plants.

Five reasons APL still is a solid income play at $30 a share:

  • APL yields 7.4% and the company has almost doubled its distribution payout over the last two years.
  • Analysts are positive on the shares. The median price target held by the five analysts that cover the stock is $40 a share. Price targets range from $38 to $42.
  • The company has an under-levered balance sheet compared to peers, which should allow it to continue to add strategic acquisitions.
  • Analysts expect revenue growth to come in at 50% in 2013 and the company has tripled its operating cash flow over the past three years.
  • All of the company's assets are in business-friendly states and are near regions with expanding production, which bodes well for future growth.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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