MLPs And Risk Reduction

It has been a brutal 2 weeks of market trading. The S&P 500 (SPY) has dropped almost 8% since November 7th -and we likely have not seen the bottom yet. How do you protect yourself? Some go defensive with MLPs and possibly some utility sector stocks.

MLPs have a few perks that make them desirable in this market. In brief, these are flow-through entities (which means high distribution percentages when compared to share price or unit cost) that engage in exploration and production, transportations, storage and processing of natural resources. Pipeline companies can have strong defensive properties in a market downturn and they are not directly tied into the price of the commodity and a federal rate-rider is built in to increase prices over time.

The Strategy for Risk-Reduction

The strategy that I use to target pipeline MLPs and utility companies both is simply this:

• In brief they are US-based companies
• yields over 5%
• Pipleline MLPs and utility companies
• 5 year earnings and dividend growth must be above 0

As you can imagine, a yield of over 5% often excludes most utility companies during a normal market - although you may find more utilities following a nasty bear market. How have the screened companies on November 7th fared (see the Seeking Alpha article with more detail on historical back-testing and initial portfolio creation)?

On November 7th, these were the only companies that met the above strategy.

Ticker	Return	Avg Shr Cost	Current Price	Days
EPD	-0.62%	$44.85	$44.57	17
TCLP	-0.19%	$46.19	$46.10	17
WPZ	-3.24%	$58.09	$56.21	17
BWP	-9.63%	$28.56	$25.81	17
DPM	0.25%	$43.38	$43.49	17
AVG	-2.69%

Below is a chart showing how the simulated portofolio fared compared to the S&P 500. Dividends are not included.

(Simulated Portfolio compliments of Portfolio123.com - click on chart to enlarge)

In capital gains the portfolio is down 2.68%. When you factor in Boardwalk Pipeline's (BWP) distribution payment, that number is cut down to a loss of 2.3%. Not good, but it is still beating the market by 5.5%.

Charts for Holdings

Two New Stocks Making the List

• Two utility stocks worth looking at are Entergy Corporation (ETR) and Exelon Corporation (EXC) which now offer around 5% dividend yields.

In my opinion, there is nothing particularly noteworthy about these two companies other than their having reached the 5% yield metric. As forward growth is pointing down, you'll need to keep your eyes on these two to ensure the 5 year growth stays positive - particularly on dividends.

Lesson Learned on Market Downturns?

What is the lesson learned here? As the saying goes, the markets can remain irrational longer than you can remain solvent. Despite due diligence, fundamental and technical analysis, and economic forecasting, there is good reason to be cautious and select your safest picks during these paranoid markets.

A similar strategy excluding MLPs will be discussed in an upcoming article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.