New ETN Doubles Your Income
The Dynamic Wealth Report
July 16, 2010
by Corey Williams, Editor
Income investors are a unique breed. Their primary goal is to
generate income from their investments to cover living expenses. But at
the same time, they need to avoid losses to keep their nest eggs intact.
Here’s the problem…
With interest rates at historic lows, safely generating income has
become much more difficult. According to one study, the 100 biggest
money market funds are currently paying an average of 0.5%…
At 0.5%, a $1 million nest egg only generates $5,000 a year… not exactly
enough to live the good life or even cover basic living expenses for
that matter.
Clearly, income investors must look for higher yields elsewhere. Many
are turning to long term U.S. Government Bonds. They see these as safe
investments that can produce more income.
Not so fast my friend…
It’s true the U.S. government isn’t going to default on its debt
payments anytime soon. But that’s where the “safety” of government bonds
ends.
What many investors don’t understand is how much of their nest egg they
can lose when interest rates start to rise.
It’s simply the way financial markets work. When yields rise, prices
fall. And the effect is more dramatic on longer term bonds like 30-year
Government Bonds. It could and probably will lead to major capital
losses for income investors with large treasury holdings.
So what’s an income investor to do?
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Take a look at Master Limited Partnerships or MLPs.
A MLP is a unique investment. It’s taxed like a limited partnership, but
the investment units are traded just like stocks.
Some of the most intriguing are energy infrastructure MLPs. These MLPs
generate a majority of their income from the transportation and storage
of energy commodities. They offer higher yields than Treasuries. And
they won’t lose value if interest rates go up. (However, they can lose
value if demand for energy declines.)
It’s no secret the price of commodities like oil and natural gas is very
volatile. But demand for these commodities is much less volatile than
their price. In fact, the cash flows from energy infrastructure MLPs are
relatively consistent and predictable.
This makes the dividends paid by Energy Infrastructure MLPs consistent
as well.
There are several MLPs I like right now. Kinder Morgan Energy Partners
LP (KMP), Enterprise Products Partners LP (EPD), and
Enbridge Energy
Partners LP (EEP) just to name a few. They all offer yields around 7%. Far better than what you’ll get in a money market or even
Treasuries.
Many income investors have stayed away from MLPs because of their tax
implications and for good reason. Owning a MLP is more involved than
owning a stock.
Without going into too much detail, here’s the main difference. Dividends on MLPs are only taxed at the individual level. This is
different than corporate dividends that are taxed at the corporate and
individual level.
That means dealing with K-1 tax forms. It can create a big headache when
income tax season rolls around.
But a new ETN (Exchange Traded Note) from the Swiss investment bank,
UBS
(UBS), gets rid of the MLP tax headache. And it doubles the yield on
Energy Infrastructure MLPs.
Introducing the UBS E-TRACS 2x Leveraged Long Alerian MLP
Infrastructure Index (MLPL).
MLPL began trading just last week. The ETN tracks an index of 25 Energy
Infrastructure MLPs.
Here’s how it works.
MLPL is a debt security issued by UBS designed to track an index of MLPs. In return for buying shares of MLPL, UBS promises to pay investors
twice
the return and income of the index.
The current yield on the index is 6.87%. But MLPL pays out twice as
much. The current annual leveraged yield is a whopping 12.89%! Now
that’s some serious income!
And since you’re investing in an ETN, not the MLPs directly, the income
is taxed as ordinary income on a 1099. No K-1 tax headaches with MLPL!
One other important note on leverage. Many leveraged ETFs and ETNs
compound on a daily basis. But MLPL only compounds once a month.
By compounding less frequently, the negative impacts of daily
rebalancing are diminished. It makes MLPL less volatile and a better
option for your long term holdings.
All in all, MLPL is a great way to generate meaningful income. It offers
a much higher yield than money markets and Treasuries. And now you can
do it without the headache of dealing with K-1s at tax time. (Sounds
like a win – win situation to me.)
Take a look at MLPL for your account today…
• Cousins Properties (CUZ) was
upgraded by Robert W. Baird this week. They now have an outperform
rating on the stock. The commercial properties REIT is trading at
a discount to its net asset value.
• Vivus (VVUS) was downgraded to neutral by
JPMorgan this week. The biotech company’s weight loss drug wasn’t
recommended for FDA approval.
• Jefferies started coverage on Wynn Resorts (WYNN) this week with a
buy rating. The casino resort operator recently started paying a
dividend.
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