Oil Futures 6/17 Down 1%

Just checked the futures and WTI is down another percentage point this morning. Really curious to see how the MLPs in the MIP portfolio will perform on Monday. Unfortunately as much as I would like to believe that the MLPs are primarily driven by supply and demand dynamics impacting their pipeline and terminal fees, crude fluctuations will probably drive the price action tomorrow.

Advertisements

Energy Income, MLP or Majors?

The goal of the Millennial Income Project (MIP) is to create a well diversified, low correlation, high income producing portfolio that an average investor can replicate. To create this, I am looking for investments with steady, relatively safe, and growing cash flows. This is important to me because a key pillar of this portfolio is it’s ability to generate cash to be redeployed to the best opportunities within the portfolio for continued growth. Ultimately, the portfolio that gets create by leveraging the wisdom of the crowd, I hope will be able to produce a sustainable income that can help the investor live a better life.

A key pillar of this portfolio I believe will come from the energy sector. The energy industry’s history of paying sizeable dividends, and the favorable tax treatment of MLPs (Master Limited Partnerships), has always made this industry an attractive one from an income investor’s standpoint. From reading one of my latest posts you’ll see that the MIP portfolio currently holds an MLP ETF (Global X MLP ETF MLPA). I believe Energy MLPs are an interesting investment for income investors to consider due to their rateable business, and tax advantaged structure, which can provide income in a portfolio that can be redeployed back into the MLPs or elsewhere, where the risk weighted return is best. MLPA’s mid 8% yield and lower expense ratio (45 bps) is generally why I have held MLPA over AMLP (Alerian MLP ETF). However, when the MLP sector is under pressure and I am in a losing position, I may rotate out of one and into the other to capture tax loss selling.

Thus far in developing the MIP portfolio, I have leaned towards MLP ETFs to access cash flows from the energy industry; but is that best? The energy sector, utilizing the XLE (Spdrs Energy Select Sector) as a proxy for the U.S. industry offers a 3% dividend yield, which I have considered too low to support reaching my target portfolio yield (roughly between 5% to 10%). However, I am looking to the crowd to get perspectives on whether I should:

  • Dump Energy altogether as a pillar in the MIP Portfolio
  • Reduce the size of the MLPs importance in the portfolio and add more large, diversified energy allocations such as the XLE.
  • Consider alternative vehicles to access these cash flows, such as Closed-end Funds or ETNs (Exchange traded notes).
  • Consider energy in a completely different context

Something else I have been considering is adding Energy related REITs as an alternative to MLPs; however I am finding it difficult to find companies in this space other than CORR (CorEnergy Infrastructure Trust).

I recognize that MLPA may not be the best vehicle to access energy cashflows, so if there is a better vehicle out there for the average investor, please comment below and let us have a conversation. You aren’t just helping me here, you’re helping any income investor that want’s to have the best possible income portfolio out there.