The looming risk (or likely fact) that interest rates will rise has been on the mind of investors and Wall St. analysts and pundits for quite some time. Most will concede that the Treasury bond market, after a stunning 30-year rally, will be the largest casualty when rates start their inevitable climb. But many investors are concerned about other sectors that will be affected. In a research report out today, the MLP team at Credit Suisse Group A.G. (NYSE: CS) looks at how rising rates may affect MLP stocks.

Master limited partnerships (MLPs) outperformed the S&P 500 during mid-2004 and mid-2007, the most recent period of rising interest rates in the past 20 years. MLPs lagged the performance of utilities during that time and were roughly in line compared to REITs. All of these income-oriented equities outperformed bonds. The outperformance relative to the S&P 500 in the 2004 to 2007 period does not necessarily mean MLPs would outperform again should interest rates increase. However, other factors currently in place lead the Credit Suisse analysts to believe that MLPs would outperform again should interest rates rise.

MLPs have done a solid job building on their January gains. Following January’s 12.6% rise, the market-cap weighted MLP AMZX index held up quite well in February with a gain of 0.9%, though the index lagged the S&P 500, which gained 1.4% for the month. In March, the AMZX has moved sideways, gaining 0.66% while the Cushing MLP index has added 1.24%. For the year, the AMZX has gained 14.2% year-to-date, far outpacing the 9.5% gain for the S&P 500 but trailing the Cushing MLP Index’s 15.4% year-to-date gain. The Credit Suisse team still believes that an increased focus on crude oil infrastructure should drive performance, given the boom in North American crude oil production.

Given the historical performance of MLPs in a rising rate environment, the Credit Suisse MLP list of stocks to buy and own for the next three to five years may offer outstanding total return performance.

Plains All American Pipeline L.P. (NYSE: PAA) still tops the list at Credit Suisse, with a price target of $60. The Thomson/First Call consensus target is $57. The Plains distribution is 4.20% paid quarterly. Remember, MLP distributions can include return of principal.

Houston-based Kinder Morgan Inc. (NYSE: KMI) owns and operates energy transportation and storage assets in the United States and Canada. The company operates in six segments and is truly one of the most diversified MLPs. The Credit Suisse price target on this powerhouse is $44. The consensus target is $41. Kinder Morgan pays a 4.10% distribution.

Because of their corporate diversity, Kinder Morgan Management LLC (NYSE: KMR) also makes the list of top MLP names. The price target at Credit Suisse is $97. The consensus target is $88.12.

Magellan Midstream Partners L.P. (NYSE: MMP) transports, distributes and stores petroleum products in the United States. The Credit Suisse price target for this top name is $55. The consensus target is $51.50. Magellan pays a 4% distribution.

The last name on the list of core holdings for three to five years is Enterprise Products Partners L.P. (NYSE: EPD). Another Houston-based MLP leader, Enterprise Products provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products and petrochemicals in the United States and internationally. The price target at Credit Suisse for this one is $60.50. The consensus estimate is in line at $61. The distribution rate at Enterprise is 4.70%.

Investors are well advised to review their portfolio and look for stocks, exchange traded funds or mutual fund holdings that could suffer in the face of rising interest rates. We have written on many occasions that it is not a question of if rates will rise, it is simply a question of when.

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