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Billionaire 'Bond King' Says Buy High-Yield MLPs and Tax-Free Muni Funds Now
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24/7 Wall St. Insights
- Surging inflation numbers mean the next Federal Reserve move will be only 25 basis points.
- Energy master limited partnerships remain cheap.
- Sit back and let dividends do the heavy lifting for a simple, steady path to serious wealth creation over time. Grab a free copy of “7 Things I Demand in a Dividend Stock,” plus get our two best dividend stocks to own today. Access two legendary, high-yield dividend stocks Wall Street loves.
Investors love dividend stocks, especially the high-yield variety, because they offer a significant income stream and have massive total return potential. Total return includes interest, capital gains, dividends, and distributions realized over time. In other words, the total return on an investment or a portfolio consists of income and stock appreciation.
For example, if you buy a stock at $20 that pays a 3% dividend and goes up to $22 in a year, your total return is 13%. That is, 10% for the increase in stock price and 3% for the dividends paid.
While many across Wall Street now refer to Jeffery Gundlach of DoubleLine Capital as the current and reigning “Bond King,” the OG for many older investors is Bill Gross. Gross co-founded Pacific Investment Management and led PIMCO to unprecedented heights and success in the 1990s and early 2000s. He ran the $270 billion Pimco Total Return for years before joining Janus Capital in 2014.
In a recent article, Gross stated that he felt that the current bull market had the potential to run out of steam soon, and he suggested that it makes sense to shift to a more defensive posture. He recommended energy master limited partnerships (MLPs), especially the top pipeline companies, and also suggested higher-yielding municipal bond funds. We found two MLPs and two muni funds that fit the bill perfectly.
Energy MLPs
Energy MLPs typically pay out the majority of their earnings to avoid taxation. The top companies have long-term contracts with major integrated mega-cap giants to transfer oil and gas production via pipelines and other means of transit to desired locations.
Enterprise Products Partners
This company is one of the largest publicly traded energy partnerships and pays a 7.19% dividend. Enterprise Products Partners L.P. (NYSE: EPD) provides various midstream energy services, including:
- Gathering
- Processing
- Transporting and storing natural gas, natural gas liquids (NGL) fractionation
- Import and export terminalling
- Offshore production platform services
The company has four reportable business segments:
- Natural Gas Pipelines and Services
- NGL Pipelines and Services
- Petrochemical Services
- Crude Oil Pipelines and Services
Many analysts have always liked the stock because of its distribution coverage ratio, which is well above 1x. This makes the company relatively less risky in the MLP sector.
MPLX
This company is one of the top holdings in the Alerian MLP energy exchange-traded fund and pays a healthy 7.75% dividend. MPLX L.P. (NYSE: MPLX) is primarily engaged in transporting crude oil and refined products and terminating in the U.S. Midwest and Gulf Coast regions and natural gas gathering and processing in the northeast from its prior acquisition of MarkWest Energy in 2015. Independent U.S. refiner Marathon Petroleum Corp. (NYSE: MPC) formed MPLX.
The company’s assets include:
- Network of crude oil and refined product pipelines
- Inland marine business
- Light-product terminals
- Storage caverns
- Refinery tanks
- Docks
- Loading racks and associated piping
- Crude and light-product marine terminals
MPLX also owns:
- Crude oil and natural gas gathering systems
- Pipelines, natural gas, and NGL processing and fractionation facilities in key U.S. supply basins
Tax-Free Municipal Bond Funds
Municipal bonds offer yields that are exempt from federal income tax. They are a very solid idea now, as interest rates are set to decline over the next 12 to 18 months.
Nuveen Dynamic Municipal Opportunities Fund
Run by one of the top companies in the exchange-traded fund (ETF) business, Nuveen Dynamic Municipal Opportunities Fund (NYSE: NDMO) offers a massive monthly payout to shareholders. This fund uses leverage to achieve a higher monthly payout. For those needing tax-free income, it is more than worth the risk, as interest rates will decline to fund the leverage over the next 12 to 18 months.
- Dividend Yield = 7.92% paid monthly
- NAV = $11.29
- Expense ratio = 2.76%
Nuveen Select Tax-Free Income Portfolio
Also run by Nuveen, Nuveen Select Tax-Free Income Portfolio (NYSE: NXP) uses a tiny 0.15% fraction of leverage and is perfect for more conservative investors seeking income not subject to federal income tax. In addition, the shares trade at a discount to the net asset value at current pricing. Plus, with a 30-year track record, it is a safe bet for those looking for dependable performance.
- Dividend Yield = 4.18% paid monthly
- NAV = $14.67
- Expense ratio = 0.23%
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