Please stick to our rule of no more than 4%-5% of your portfolio in one investment. I recommend keeping a mental stop loss limit of 20%-25% of the capital at risk and exiting the trade if it's hit. We don't ever want to lose more than 1% of our capital with any one position. If you'd like to see how the math works, keep reading.

Here's How the Safe Money Option for EMC Works

Sell, to open, EMC Corp. (EMC) August $23 puts for around $0.50 with the stock trading around $23.75.

The puts obligate you to buy EMC at $23 a share if the stock falls to less than that by option-expiration day (August 16). Selling these puts gives you about $50 in your account per option contract. (Remember, one option contract equals 100 shares of stock.)

Buying 100 shares at $23 each represents a potential obligation of $2,300. To put on this trade, you will have to deposit a "margin requirement" – essentially a security deposit that reassures the broker that you can cover your potential obligation. It usually runs about 20% for put sales. (In this case, 20% of $2,300 is $460)

Here's the math.

Sell one EMC August $23 put for $50.
Place 20% of the capital at risk in your option account, $460.
Total outlay: $410.

If the markets remain unchanged and EMC trades for more than $23 on August 16, you won't have to buy the stock. You keep the $50 premium (and the $460 margin). That's a simple 10.9% return on margin in less than two months. If we put this trade on every two months – assuming all prices remain the same – this could return 65% a year on the margin amount.

If EMC trades for less than $23 on August 16, you'll keep the $50. But you'll have to buy EMC stock at $23 per share. So you'll own EMC at $22.50 (the $23 strike minus the $0.50-per-share premium). Here's how that scenario works out for each option contract you sell.

Initial income from sold put premium of $50.
Purchase of 100 shares of EMC at $23 is $2,300.
Total outlay: $2,250.

The cost ($22.50) is roughly 5.3% less than EMC's current market price. This gives a little downside protection. Plus, if you become a shareholder, you'll also receive the company's $0.40-per-share annual dividend. If EMC pays its expected dividend over the next 12 months, you'll receive a total of $90 ($50 plus $40 in dividends) on a $2,300 investment... 3.9% cash on your investment. And we'll likely sell call options against the stock to further boost our returns.

***Note: The prices in this example reflect trading on May 27.

IRA Alternative for EMC
If you're using an IRA or Roth IRA that bars you from selling puts, there's an alternative covered-call trade you can make. (These alternative trades can also be done in your regular brokerage accounts.)

This is the same strategy we use to generate income on stocks that are put to us, but if you prefer to start by owning shares and selling calls, the trading strategy works just as well.

The math is nearly identical and the returns are similar when you sell puts versus covered calls (in terms of your potential obligation, the so-called "capital at risk"). As always... for each trade, execute either the call or put trade, but not both.

Remember... with covered-call selling, you are selling a call option and simultaneously buying stock. Thus, the option is "covered" with stock. When you enter the trade in your trading platform, you should do it as a combination buy/write, or covered call.

This means you will be paying for the stock minus the premium you receive for selling the option – what's called a "net debit."

Here is how the EMC trade works as a covered call.

Buy 100 shares of EMC Corp. for about $23.75, and

Sell, to open, the EMC August $24 calls for about $0.95.

This represents a total outlay (or "net debit") of $22.80 ($23.75 stock price minus the $0.95 we receive from the call premium). Remember... you are buying 100 shares of the stock for every call option you sell against it.

Here's how the math works.

Income from sold call premium of $0.95 is $95.
Purchase of 100 shares of EMC at $23.75 is $2,375.
Initial outlay: $2,280.

If EMC shares sell for $24 or more on August 16, the stock will be "called" away from you at $24 a share. This gives you a net gain of $1.20 per share on the position (the difference between our initial outlay and the price at which you sold your shares). This is about 5% in less than two months, for an annualized return of about 30%.

Of course, if the stock trades for less than $24, your calls will expire worthless and you'll still own the stock, uncovered. You can keep the $95 premium and the future dividend stream from 100 shares of EMC. That should amount to $40 a year per 100 shares. This is a total of $135 (the $95 premium plus the $40 dividend) on a $2,400 investment, or about 5.6% a year.

The prices we've used in describing the trade are based on May 27 trading. Anyone who is familiar with options trading knows options prices can move around a lot, based on changes in the underlying stock's share price and the time to expiration.

Is it Too Late to Get into That Trade?
People often wonder what to do if the trade moves a little bit and the prices don't quite match what I've written up. The important thing is to understand that options prices move along with the underlying stock.

An assumption I make is that the "implied volatility" doesn't change much from day to day. (This may or may not turn out to be true. But it's a reasonable assumption over short periods of time.)

The prices people pay for options represent ("imply") the future variability in the price of the underlying stock. If people expect prices to rise or fall quickly, they will bid up option prices. And thus, the implied volatility increases. When people are comfortable and fearless about stocks, they won't pay much for calls or puts. Thus, the implied volatility decreases.

So... how does this influence our EMC trade and what are good prices to accept if the stock shifts around?

Below I've created a table that shows how EMC options prices should move over the next week (assuming implied volatility for the options between 25%-27%). When you go to open a position, compare the date and share price with the table. If you can sell the options near the listed price, that represents a good opportunity to open a position. So for example, if by Tuesday, EMC shares are trading for $23.25, you can safely sell the put for around $0.76 each.

Note that in the case of calls, if the stock price drops a quarter, then we will get about $0.10 per share less. Similarly, the more time passes the less value the call has. So even if nothing else changes by Tuesday, we can expect to receive less for the call.

The same thing happens with put options except in reverse. That is, the higher the stock price goes, the more the value of the option decreases. The passage of time also causes the put's value to decrease.

Again, please use this table as a guide to help gauge acceptable prices for opening today's trade. (Please note, "DTE" refers to "days to expiration.")

OKE does have a 43.4% stake in OKS' business but OKS is separate from OKE's energy-services business. So what OKE does with that business doesn't affect OKS. OKS is still going strong and is on track to deliver 8%-12% dividend growth in the coming years.

OKS gave a presentation at the Global Hunter Securities GHS 100 Energy Conference in Chicago, Illinois yesterday. The presentation has 74 slides. I'll only give you some highlights in this update. But you can view the full presentation here.

OKS is projecting 89% of its natural gas pipeline capacity will be under contract for 2013. It expects 100% of its natural gas storage capacity to be under firm, fee-based contracts for 2013. These are the same projections the company made in February, so it's clearly on track for the year.

OKS expects to get about 68% of its gross margin from purely fee-based contracts in 2013. That means 68% of its gross margin isn't exposed to commodity price swings. Much of the remaining exposure is hedged. That's great news. It's important to us that an MLP isn't overly exposed to commodity price fluctuations. We want all our MLPs to provide steady, primarily fee-based income.

OKS has a $2 billion-$3 billion backlog of unannounced growth projects in natural gas, natural gas liquids (NGL) – like propane, butane, and ethane – and crude-oil processing, pipelines, and storage. Whether OKS proceeds with an unannounced project depends on commitments by energy producers, processors, and end-users. We don't expect that to be a problem. With the enormous energy boom in the U.S., we expect producers and processors to clamor for more pipelines and storage and end users to welcome the security and lower prices that result from the increased supply.

OKS says it's still on track to deliver 8%-12% annual dividend growth from 2012 through 2015. Right now, OKS pays out a 5.9% dividend yield. If OKS continues to raise its distribution payouts at the high end of its projected range, you could be earning a double-digit yield over today's cost within five years. OKS expects to pay distributions totaling $2.87 per unit in 2013. That's a yield over the current share price of about 6%. It's also about 10.8% higher than 2012's annual payout of $2.59 per unit. So OKS does expect to deliver double-digit distribution growth this year – one of the primary reasons you'd want to own the MLP.

As you can see, OKE's announcement earlier this month has no effect on our OKS position. Our advice remains the same.

BUY ONEOK Partners, L.P. (NYSE: OKS) up to $57 a share. Right now, OKS trades around $48 per share.

Our MLP picks have performed well for us so far – up an average of 36% but if interest rates keep rising, we may have some words of caution for you.

We don't like MLPs trading at current yields of less than 4% above the 10-year U.S. Treasury yield. The 10-year Treasury yield is a key benchmark interest rate. When it goes up, interest rates for any bonds, loans, and other income investments – including MLPs – also tend to go up... which means their prices go down.

Recently, the 10-year Treasury yield has surged from below 2% to around 2.6%. That makes MLPs less attractive. Interest rates could continue to surge. If they do, we may stop out of our MLPs. I'll continue to keep an eye on interest rates and I encourage you to do the same. If they keep rising and MLP prices fall, I'll likely recommend tightening your trailing stops.

Interest rates are a big deal to MLPs. For most of the MLPs we recommend, roughly half their capital is debt. Higher interest rates mean a higher cost of capital. A higher cost of capital means some growth projects might not be worth doing. Without good growth prospects, many MLPs could become less attractive.

That doesn't mean we would ignore all MLPs... Less growth could mean higher demand relative to the supply of pipelines, processing, and storage. So companies that already own plenty of those facilities could have more pricing power should growth slow; and we like MLPs with a large and growing presence in their markets.

Also, lower MLP prices could give us the opportunity to recommend some of the MLPs that pass our model but have been too expensive in the past. Falling stock prices are generally viewed as bad by most investors. But I've learned to take the opposite view and look for the opportunities falling prices can create.


MLP Positions                                              Recent Price                Stop Loss
Vanguard Natural Resources (VNR)                    $28.04                                       $22.19
Williams Partners (WPZ)                                            $49.06                                       $40.35
DCP Midstream Partners (DPM)                           $51.36                                       $40.52
Enterprise Partners (EPD)                                         $58.84                                       $47.32
Energy Transfer Partners (ETP)                              $48.47                                       $39.20
ONEOK Partners, L.P. (OKS)                                    $47.81                                       $44.85
Kinder Morgan Mgmt. (KMR)                                  $80.56                                       $60.42

The press is beginning to catch on to an area generally ignored by large investors.  However, it's an extraordinary place to shop for great income investments.  These income-producing businesses have top brand-name products.  They generate steady free cash flow.  They have major competitive advantages over their competitors and they pay out big dividends.   I'm talking about the best small-cap dividend-paying companies in America.  

One of my favorite stocks here, Diebold (NYSE: DBD), was just profiled in the financial weekly Barron's.   Diebold is the world's No. 1 supplier of automatic teller machines (ATMs).  It's also a leading supplier of security products, like bank vaults and safes.  It's a 150-year-old company. and it has increased its dividend payment every year for 59 years, which is the longest streak of any company in North America.  Even the 2008 financial crisis didn't stop Diebold from raising its dividend payouts a few cents each quarter.

In 2007, Diebold paid $0.94 per share in dividends.  For 2012, shareholders received a total of $1.14 per share.  That's a 3.6% yield at today's price.   It's important to focus on elite dividend-paying companies like Diebold because they allow you to safely compound your money.  Any sophisticated investor – including Peter Lynch and Warren Buffett – will tell you that "compounding" is one of the most important investment concepts to understand.  Albert Einstein called it "the most powerful force in the universe." 

Compounding is reinvesting the money you make from an initial investment to make even more money.  In short, you earn money on the money you earn.  If you do this over a long period, with an asset that pays increasing rates of income, you can earn staggering profits from your initial investment.   Most people who want to compound their returns over decades will look to buy well-known staple stocks, like Coke or McDonald's.  The trouble with many top dividend-payers like these is that you often have to wait years to pick them up at bargain prices.  Since everyone is familiar with these names, everyone wants to buy them.

I'd guess not one investor in 100 has heard of Diebold and its amazing dividend streak.  It has a lot of the same positive attributes that giant dividend-payers like Coke and McDonald's have.  It just happens to be much, much smaller than these giants.  With a $2 billion market cap, it's less than 2% the size of Coke. 

Like other top small-cap dividend-payers, Diebold provides brand-name products and services you might use every month but its small size makes it fly under the radar of most investors.  Big pension funds, mutual funds, and hedge funds are often too big to buy this kind of stock but I'm seeing the press mention these stocks more often.  If you're interested in a serious income stream for the future, make sure to buy soon.

By Frank Curzio

The crisis is OVER for big banks. During the 2008-2009 credit crisis, financials were one of the worst-hit sectors. Without cash injections from our government, several big companies in this sector may have fallen into bankruptcy. That includes heavyweights like Citigroup and Bank of America.

But things are looking much better these days. And bank stocks are setting up to be huge winners over the next 12 months. In the first few years following the crisis, banks faced huge headwinds. The housing market was still depressed. In short, there were tons of foreclosures (bad assets) on the balance sheet of banks. These homes couldn't be sold at market prices. Plus, heavy regulation was on the way. Most new rules proposed by our government were designed to shrink banks – which in turn would lower profits.  

Under these conditions, it did not make much sense to own banks. However, many of these conditions have now reversed. And many banking stocks – despite their quick move higher over the past few months – stand to benefit greatly both in the short and long term. Let me explain...  

Over the past two months, interest rates have been on a tear. The 10-year Treasury bond yield is up 49%. And mortgage rates have jumped from 3.4% to 4% (an 18% increase) in the same time frame. These are both 15-month highs. And for interest rates... those are major moves in such a short period.

THE MARKET IS BULLISH ON ROBOTS

America's urge to speculate in high-growth "story stocks" is alive and well. For proof, all we need to do is look at shares of iRobot. There aren't many "slam dunk" guarantees one can make about technology investment. It's a sector that changes monthly. One year's big success story is another year's big bankruptcy. However, one trend we can count on is the increasing use of robots to manufacture cars, work in labs, and perform heavy military duties.

As machines get lighter, faster, stronger, and smarter, the robotics market will mushroom in size. One of the few "pure plays" on robots is iRobot (IRBT). Although most folks have never heard of it, the $1 billion market cap company is one of the world's largest robot-makers. Some analysts even call the company "the GM of robots."

It has a huge potential market to grow into over the coming decade. As you can see in the chart below, investors are piling into this great "story stock." Shares of iRobot have climbed from $18 in late 2011 to $37. Yesterday, they surged more than 7% to reach a new 52-week high. With a rich price-to-earnings ratio of 37, iRobot is not cheap but the market is willing to "pay up" for good growth stocks right now.

The stock market is down about 2% since last week. This usually worries most investors. But it shouldn't.
It's a good thing when the market takes a breather. When stocks go up and up without a pause, they'll eventually crash hard. The more small corrections you get along the way, the better it'll be over the long term.

We like to see corporate management buying back shares and increasing shareholder value, not issuing new ones. But with master limited partnerships (MLPs), it's a different story. When MLPs issue more units, it means they are gearing up to fund new growth projects.

Three of our targeted master limited partnerships (MLPs) are either currently raising capital or getting ready to. Energy producer Vanguard Natural Resources (NYSE: VNR) sold 8,050,000 new common units at $28.35 each. Natural gas liquids producer Williams Partners (NYSE: WPZ) just filed to sell up to $600 million of new common units and pipeline operator Energy Transfer Partners (NYSE: ETP) filed to sell up to $800 million of new common units.

We don't know which capital-raising efforts are for which internal projects. But we know that VNR, WPZ, and ETP all have new growth projects planned and underway. Regular equity and debt issuances are normal for thriving, healthy MLPs. It's one way we know their growth plans are on track and ready for funding. I'll provide more updates on future growth projects for these MLPs as information is released.

Another pipeline operator ONEOK Partners (NYSE: OKS) gave a 97-slide presentation at the Wells Fargo "Kick the Tires" financial conference yesterday in Houston. The presentation was about OKS and its parent company and general partner, ONEOK (OKE). Based in Tulsa, Oklahoma, OKS specializes in three related businesses: natural gas gathering and processing, natural gas pipelines, and NGLs. It's one of the biggest U.S. companies in all three businesses.

Since January, we expected the company to continue growing its dividend at an annual rate of 8% or more for the next couple years and that is due to the expanding energy boom in the U.S., we could expect several growth projects from the company over the next few years. According to yesterday's presentation, OKS is painting a similar picture. Here are some highlights from the presentation.

ONEOK Partners is seen as ONEOK's primary source of growth. OKS has announced about $5 billion of growth projects for the period 2011-2015. About $2 billion are completed. In the end, the company will spend about $2.6 billion in the Williston Basin in Bushton, Kansas (mostly on gas processing), about $1 billion in NGL "capital" Mont Belvieu, Texas and about $1.4 billion in the region between Kansas and Mont Belvieu (mostly on NGL pipelines and processing).

ONEOK also said in the presentation that it has $2 billion in new growth projects it has not announced yet. They're all in natural gas pipelines and processing, NGL processing and storage, and crude oil transportation (rail loading facilities and pipelines). ONEOK Partners generates primarily fee-based income. That means its earnings won't fluctuate up and down with the price of the energy commodities it transports and processes. That makes it a stable source of income for investors. ONEOK Partners expects to generate 68% of its gross profit from fee-based sources this year.

Right now, OKS yields 5.5%. But all that growth should drive 8%-12% cash distribution growth over the next couple of years. The advice on ONEOK Partners remains unchanged.

BUY ONEOK Partners (NYSE: OKS) up to $57 a share.

INVESTOR TIP 
The general partner (GP) gets the lion's share of growth from the limited partner (LP). Many MLPs today get less than half the growth, because so much goes to the GP. That just means the GP gets a percentage up to 50% of the distributable cash from the MLP. Distributions to the GP tend to rise faster than those to the MLP unitholders. It's like that so the GP has an incentive to grow the MLP's distributions.

The only reason to buy the MLP over the GP is because the MLP delivers higher current income. If I recommended the GP, I'd get a million e-mails asking why I don't recommend the higher-yielding LP units. But insisting on high current income naturally increases the amount of risk you take.

That's why we only concentrate on the safest MLPs, so we can keep the risk down to a minimum. We only pick MLPs that cover their cash distributions well and don't take on too much debt. We also don't pick MLPs that get too much of their revenue from businesses that are sensitive to changes in commodity prices. That keeps us safe and keeps risk down to a minimum.

Take ETP for example. It's dividend reinvestment plan (DRIP) reinvests shares at a 5% discount to current price. Over time, that 5% discount gives you the chance to buy an additional 5% more shares which gives you the opportunity to make even more money because those extra shares' dividends will buy more new shares.

Example: Say you buy 21 shares of a stock instead of 20 shares. Over time, that extra 5% will tend to push your rate of compounding up 5%. So instead of compounding at, for example, 10% a year, you might compound at 10.5% a year. After 20 years, a $10,000 investment would be worth about $67,000 at 10% a year and about $73,000 at 10.5% a year.

Remember, never put more than 5% of your portfolio in any one dividend grower or more than 3% in any other stock.

There are three important attributes you must know about master limited partnerships.

First, they don't pay corporate taxes as long as 90% of their revenue is generated by "qualifying sources," like pipelines and other energy industry assets. Instead, they pay a minimum quarterly distribution as determined by the document that establishes the partnership. DCP Midstream Partners (DPM), for example, has a minimum required distribution of $0.35 per quarter, or $1.40 per year. Currently, it's paying $0.67 per quarter, or $2.68 per year. So it's almost double the minimum required distribution.

Second, most of an MLP's cash distributions will qualify as "return of capital." In most cases, you can defer the payment of taxes on return of capital distributions until you sell your MLP shares (commonly called units). In most cases, MLPs are not appropriate for tax-advantaged retirement accounts, like IRAs. If you put an MLP into a retirement account, you can wind up incurring a new tax liability called unrelated business taxable income (UBTI). Ask a tax professional about UBTI before attempting to put an MLP into an IRA or other retirement account.

Third, MLPs are managed by general partners (or GPs). The GP usually owns a 1% or 2% stake, as well as some of the limited partner units. DCP Midstream, LLC owns a 1% general partner interest and a 26% limited partner interest on DPM.

Like most general partners, DCP Midstream also owns incentive distribution rights (IDRs) on DPM. IDRs give the general partner of an MLP an incentive to grow the MLP's limited partner cash distributions. IDRs allow the general partner's share of cash distributions to rise as it increases the limited partner distributions beyond certain milestones. The GP can wind up earning more than half of the distributable cash flow. That usually takes many years to achieve, and the distributions to limited partners must increase dramatically before it can happen.

When you buy units (like "shares") of a publicly traded MLP, you become a limited partner (or LP). As an LP, there are a strict set of tax advantages (and pitfalls) you should be aware of.

Tax Advantages of Owning an MLP
When you own an MLP, you receive a special tax form from the IRS called a Schedule K-1. Schedule K-1 has three sections. In the first and second sections, you report information to identify the partnership and yourself. You report your income, deductions, credits, and other important items in the third section of Schedule K-1. Consult a tax professional to help you with this form if it doesn't make sense to you.

If you choose to invest in a Master Limited Partnership, the cost basis of your units will adjust up or down each year. The amount and direction of the adjustment depends on a few different variables: the level of cash distributions (if any), taxable income, and deductions (depreciation), which you'll report in section three of the Schedule K-1.

The tax advantages for MLP investors can be very good. For example, the cash distributions you get will likely be classified as return of capital. It's unlikely you'll incur a tax liability related to return of capital distributions until you sell your MLP.

Deferring taxes can work out quite well. In some cases, you might not have to pay the tax at all... According to the website of the National Association of Publicly Traded Partnerships (naptp.org), "As long as your adjusted basis is above zero, tax on your distributions is deferred until you sell your units." Moreover, "if a unit holder dies and the units pass to his heirs the prior distributions are not taxed."

Imagine earning a great income in the last couple decades of your life, incurring no tax liability on it, and then passing the units along to your heirs who will incur no liability on your distributions, either.

Tax Pitfalls of Owning an MLP
There are potential tax pitfalls in owning MLPs, too... If you're a young person, you might want to think twice about owning an MLP for too long.

Notice in that quote from the NAPTP above, where it says, "as long as your adjusted basis is above zero." Basis means your cost basis, or how much you paid for your MLP units. When you receive a distribution that's qualified as return of capital, it isn't counted as income but it does reduce your cost basis.

For example, if you paid $20 a share and receive a $1 return of capital distribution, your new cost basis is $19 for future tax purposes. So after $20 in distributions, your cost basis goes to zero. When that happens, all future distributions paid to you are no longer sheltered as return of capital, but instead become fully taxable. So when an MLP's cost basis gets to zero, one of the primary reasons for owning it disappears.

So if you're young, invest in an MLP, and own it for a long time, your adjusted cost basis could go below zero. If that happens, you could incur a huge tax liability when you sell.

While MLPs might be appropriate for retired investors, you must be careful about putting MLPs into a retirement account. The problem is what's known as "unrelated business taxable income" (or UBTI). If it's determined that your MLP distributions count as UBTI, you may have to pay tax on your retirement account.

Again... It's very important to understand the tax implications of investing in MLPs. I highly recommend seeking the advice of a tax professional, preferably a certified public accountant or licensed attorney with years of experience in taxes, before jumping in to any position.

Our Proprietary Method for Finding MLP Investments That Consistently Create Shareholder Value
Once you've decided you want to invest in an MLP, then what? How do you find a company with a safe dividend, run by a management team that treats unit holders well?

Well, it can be complicated. MLPs all report their results a little differently. They produce and transport several types of commodities. So they're always using different measurements like cubic feet, barrels, gallons, tons, etc. That makes it hard to compare them in an apples-to-apples fashion.

One of the hardest jobs investors have is figuring out if management is doing the right thing for the business. By tracking management's effectiveness at long-term wealth creation, our seven-step proprietary model helps investors do just that. And it provides us with a potentially durable competitive advantage over other MLP investors.

We want MLPs with a proven ability to grow their net worth by at least as much as the amount of cash flow they keep. If the net worth grows by the same amount as retained cash, management is at least treading water and not destroying value. If net worth can grow by more than the retained cash, it's increasing shareholder value.

For example, if a company makes $10 a share in cash, we want to see as little of that cash retained as possible. For every $1 retained, we want to see more than $1 of increase in net worth.

Our criteria for selecting the best MLP investments boils down to seven key questions. The questions are designed to find those MLPs that do the best job of creating value and income for investors. Some answers are short. Some are long. But all are complete and tell you what you need to know to understand how each MLP you analyze can provide you with a growing, high-yield, tax-advantaged income for several years.

MLP Selection Criteria

Pipeline MLPs can be an excellent source of current, tax-advantaged income and long-term capital appreciation. But they are also complex business structures that can be very difficult to evaluate and compare. The following seven key questions help us identify the highest-quality MLPs at any given time.

• What are the prospects for future growth?
• Is there too much commodity price risk in the MLP's revenue stream?
• Does the MLP consistently generate positive net cash flow from operations?
• Does the partnership have a history of increasing annual distributions?
• Are distributions being made in excess of distributable cash flow from operations?
• Does the MLP distribute the majority of its distributable cash flow from operations?
• Is management generating an acceptable return on any cash it retains?

There are some terms in there, like "net cash flow from operations" and "distributable cash flow from operations." We'll explain them all as we use them.

There are six stocks that fit our MLP criteria. Just because they fit the model doesn't mean you should buy them immediately. It means they create shareholder value and should be bought when the price is right.
Keep in mind these companies may seem like complex businesses. But they all boil down to two main businesses: transportation and storage of energy products. Let's start with our No. 1 MLP recommendation.

Earn an 8% Yield in This "Boring" Energy Stock
Energy Transfer Partners (NYSE: ETP) is one of the largest natural gas pipeline MLPs in the country. It has $15.5 billion in assets and a market cap over $10 billion.

Energy Transfer wholly or partially owns and operates 23,500 miles of natural gas and NGL pipelines in the Northeast, Midwest, and Gulf Coast regions of the U.S. It also owns natural gas storage and distribution terminals and natural gas processing facilities. And as you'll see below, it's becoming a major presence in the oil pipeline business, too.

Energy Transfer has four main businesses: Intrastate, interstate, midstream, and natural gas liquids. (Intrastate means pipe­lines within a single state's borders. Interstate means pipelines that cross state borders.) It's adding a fifth business later this year. (More details on that in a minute.)

Intrastate Pipeline Business
Energy Transfer's biggest business is its intrastate pipe­line business. This business transports natural gas within the state of Texas. It's the largest intrastate natural gas pipeline system in the U.S., with about 8,300 miles of natural gas pipe­lines. These pipelines move natural gas from some major gas-producing regions in Texas to major metropolitan and industrial consumption areas in the state. They also connect to other pipeline systems that serve areas throughout the U.S.

Interstate Pipeline Business
Energy Transfer's second-biggest business is its inter­state pipeline business. This business moves natural gas around the country, frequently crossing state lines. It's roughly 8,500 miles of fully and partially ETP-owned pipelines in the South­east, Northeast, and the Midwest.

The biggest pipeline system in Energy Transfer's interstate busi­ness is the Transwestern Pipeline. It's about 2,700 miles of pipeline with various capacities from 1.225 billion cubic feet per day to 1.61 billion cubic feet per day. Tran­swestern carries gas from major producing basins in Texas, New Mexico, and Oklahoma to markets in the Midwest, Texas, Arizona, New Mexico, Nevada, and California.

ETP also owns a 50% stake in the 5,500-mile Florida Gas Transmission system (pipeline giant Kinder Morgan owns the other half). Florida Gas Transmission is the dominant natural gas pipeline system in Florida. It delivered 63% of the natural gas consumed in Florida in 2010, the latest year for which we have data. It has more than 60 connections with intrastate and interstate pipeline systems.

Midstream Pipeline Business
Energy Transfer's third-largest business is its midstream pipeline business. Midstream owns and operates about 7,400 miles of natural gas gathering pipelines, as well as 28 facilities for processing, treating, and conditioning natural gas. If you think of pipelines like roads, ETP's interstate and intrastate systems are the highways and main streets. Midstream gather­ing pipelines are the backstreets and side roads. They gather gas where it's produced. Then they transport it to natural-gas-processing facilities. (Processing separates byproducts and impurities from natural gas.)

Natural Gas Liquids Business
Energy Transfer's smallest business is its natural gas liquids business... which processes, transports, and stores NGLs. Most of Energy Transfer's NGL business is done through its 70% stake in Lone Star NGL. The biggest asset in this business is the 1,066-mile West Texas NGL pipeline. The pipeline has a total capacity of 144,000 barrels of NGLs per day. Lone Star also has a 43 million barrel NGL storage facility near the Gulf coast in Mont Belvieu, Texas. (U.S. NGL demand is about 2.4 million barrels per day.) Mont Belvieu is home to one of the largest NGL storage and trading complexes in North America. If you want to grow in the NGL busi­ness, this is the place to be.

As I mentioned above, Energy Transfer's new fifth business, its oil pipelines business is a big source of revenue as well. ETP recently closed on its $5.3 billion acquisition of Sunoco (NYSE: SUN). ETP now has control of Sunoco's 32.4% interest in Sunoco Logistics Partners (NYSE: SXL).

SXL is an oil and refined products pipeline MLP. (Refined products are gasoline, diesel fuel, jet fuel, and other products that come from refining crude oil.) It's the only crude oil carrier with a major pipeline extending from the middle of one of the biggest oil discoveries in U.S. history straight to the Gulf Coast. The discovery is the Cline shale in West Texas. Cline is located in the Permian Basin; which generates 20% of U.S. oil production.

ETP will also receive Sunoco's 2% general partner interest and incentive distribution rights (or "IDRs") in SXL. Incentive distribution rights allow the general partner to earn larger amounts of SXL's distributable cash flow as the limited partner distributions grow. IDRs exist to give the general partner an incentive to grow the limited partner's distributions. So IDRs can make the general partner's income grow faster than the limited partner's income.

Like Energy Transfer and many other pipeline companies, SXL isn't just in one business. It's in several related energy transportation and storage businesses with more than 7,900 miles of pipelines and 39 million barrels of storage in the U.S. It's a lot of moving parts, but SXL's basic services are the same as all the other pipeline companies: transportation and storage of energy products. Now let's see how Energy Transfer stacks up against our MLP criteria.

1. What are the prospects for future growth?
Future growth looks promising for ETP. Ever since Energy Transfer announced it was buying Sunoco, growth prospects for SXL improved. And with a controlling stake in SXL, ETP grows faster when SLX grows faster. As part of a bigger company, it'll be easier to get the equity and debt capital to pay for new pipelines and expansions of existing pipelines. It will also be able to take on bigger projects than before.

2. Is there too much commodity price risk in the MLP's revenue stream?
No. As of mid-2012, 69% of ETP's gross profit is fee-based. So only 31% is exposed to commodity prices.

3. Does the MLP consistently generate positive net cash flow from operations?
Yes. ETP generates net cash flow from operations every quarter. In the four quarters ending June 30, 2012, it generated $1.3 billion of net cash flow from operations. It's very stable. This is one reason why it's a great investment. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.

4. Does the partnership have a history of increasing annual distributions?
Not recently. But that could change. There are several acquisitions and growth projects which could result in higher distributable cash flow. And the company is predicting this will result in about 6% higher distributions by late 2013. As of October 2012, ETP pays out an 8.4% dividend yield.

5. Are distributions being made in excess of distributable cash flow from operations?
Like most MLPs, ETP might distribute more than its distributable cash flow every several quarters. ETP's goal is to distribute 100% of its distributable cash flow. Every now and then, it will distribute a little more or less than that. But over the long haul, it'll distribute 100% of its distributable cash flow.

6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. As we said in the previous question, Energy Transfer distributes 100% of its distributable cash flow.

7. Is management generating an acceptable return on any cash it retains?
Energy Transfer pays out 100% of its distributable cash flow. So it retains no cash. Still, it's able to increase net worth value consistently, because management is very good at investing borrowed money. During the eight quarters through June 30, 2012, it increased net worth by nearly 18%.

BUY Energy Transfer Partners (NYSE: ETP) up to $54.

One of the Best Income Stocks In the World
Enterprise Products Partners L.P. (NYSE: EPD) is the largest publicly traded energy partnership in the United States. It owns 50,700 miles of pipelines for transporting natural gas, NGLs, crude oil, refined products (like gasoline, diesel fuel, and jet fuel), and petrochemicals.

EPD has pipelines connected to approximately 95% of the crude oil refining capacity located east of the Rocky Mountains. And it is a key or sole supplier for every ethelyne steam cracker in the country. These plants produce ethelyne from the ethane NGL They're the largest consumers of natural gas liquids in the United States. This puts Enterprise in a good position to profit from the increasing popularity of valuable NGL production.

The company owns 190 million barrels of total storage capacity for storing NGLs, refined products, and crude oil. It owns 14 billion cubic feet of natural gas storage. And it owns 25 natural gas processing facilities, and 20 facilities for processing NGLs and propylene (a petrochemical).

Enterprise doesn't only ship energy products through pipelines. it also ships them on boats. It owns 125 barges for shipping various energy products and 58 tow boats for towing the barges. Enterprise also owns import/export terminals in the Houston Ship Channel in the Gulf of Mexico. Those terminals can move a total of 21,000 barrels of NGL, crude oil, and other liquids per hour.

Enterprise Products Partners has assets are all over the United States. This company is an indispensable part of the country's energy infrastructure. Our standard of living in the United States would be a lot lower without EPD's critical energy transportation, processing, and storage assets.

Enterprise Products Partners is a little different than most MLPs. As we described earlier in this report, most MLPs are run by a general partner. The general partner earns a growing share of the distributable cash flow of the MLP.

But EPD has no general partner. So 100% of the growth in distributable cash flow goes to the limited partners. That's you, the limited partner unit holder. If we could re-design the entire MLP sector, we'd probably make every investment like this. But even with general partners, some management teams do an excellent job of creating value and growing dividends for the limited partner unit holder. Now let's see how it stacks up against our MLP criteria.

1. What are the prospects for future growth?
Excellent. As of mid-2012, EPD has $7.5 billion in new growth projects underway. It's spending $4 billion in the Eagle Ford shale in Texas to expand its pipelines and natural gas processing capacity. It's currently expanding NGL pipelines throughout the American West. And it's proposed a new 1,230 mile pipeline to transport ethane from the Marcellus/Utica shale areas to the Gulf Coast.

2. Is there too much commodity price risk in the MLP's revenue stream?
No. EPD doesn't have much commodity price risk, and it's consistently reducing whatever little it does have. In 2012, it expects 77% of gross profits from fee-based contracts (remember... fee based contracts = no commodity exposure). It's expecting to increase that to 80% in 2013.

3. Does the MLP consistently generate positive net cash flow from operations?
Yes. Last year, it generated $3.33 billion in net cash flow from operations. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.

4. Does the partnership have a history of increasing annual distributions?
Yes. As of fall 2012, EPD has raised its annual distribution every year for 13 years in a row and pays a 4.7% dividend yield.

5. Are distributions being made in excess of distributable cash flow from operations?
No. EPD is a big, blue-chip pipeline and processing company. It consistently generates plenty of cash flow and pursues a policy of covering its payouts with more than adequate cash generation. This makes its dividend very safe.

6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. In 2011, it distributed 65% of its distributable cash flow from operations. This is a strong, stable dividend, with plenty of coverage.

7. Is management generating an acceptable return on any cash it retains?
Recently, no. In the eight quarters through Jun 30, 2012, net worth fell by about $0.14 for every $1 retained. We expect this to turn around soon, as management continues to invest in new growth projects.

As you can see, Enterprise Products Partners is a large, growing company. And it generates a reliable, growing stream of income for investors. At this time of EPD is well above our maximum buy price of $26 per share. Keep it on your radar. Enterprise Products Partners, L.P. is one of the most well-known MLPs. It doesn't drop into buy range often. But when it does, pounce and buy enthusiastically.

A Dominant Player in a Little-Known Corner of the Energy Industry
DCP Midstream Partners L.P. (NYSE: DPM) a primarily player in natural gas gathering and processing.  Remember, natural gas processing is an essential step in transporting natural gas to customers across the country. When raw natural gas comes out of the ground, it contains impurities and heavy hydrocarbons (the NGLs we discussed earlier) that, if not removed, cause blockages in the transportation pipelines. Once separated out (through a process called "fractionation"), NGLs – butane, propane, and ethane are valuable in and of themselves.

DPM owns about 6,000 miles of natural gas and NGL pipelines. It also owns 12 natural gas processing plants, and four fractionation plants. Processing is DPM's biggest business. About 71% of its gross profit comes from natural gas processing. Another 15% is from moving and storing NGLs. And another 14% comes from wholesale propane sales.

DPM's general partner is DCP Midstream, LLC. DCP Midstream is the largest gatherer and processor of NGLs in the country. It's a huge company, with 56,000 miles of pipeline, 49 processing plants and eight fractionation facilities. DPM's association with its general partner helps give it access to new investments it might not otherwise be able to make, since it can sometimes participate in co-investments with its much larger parent and general partner.

DCP Midstream LLC is a 50/50 joint venture in Spectra Energy and Phillips 66. Spectra is a large natural gas pipeline company. Phillips 66 is a large, diversified energy company. The joint venture owns a 2% general partner interest and a 26% limited partner interest.

Between DCP Midstream, LLC, Spectra, and Phillips 66, DPM can draw on the expertise, experience and opportunities from three major players in the U.S. domestic energy market. It's like having three "rich uncles" helping you out in a business venture. We think it makes DCP Midstream L.P. a better investment than most other MLPs. Now let's see how DCP stacks up against our MLP criteria.

1. What are the prospects for future growth?
Over the next three years (2012-2015), DPM estimates it will make $3 billion worth of new growth investments with its general partner alone. Today, about 15% of DPM's gross profit comes from moving and storing NGLs. By 2015, it expects that will grow to as much as 45% as it ramps up growth in its NGL business.

As of June 2012, DPM had identified seven different pipeline and processing projects scheduled to begin generating revenues between 2012 and the end of 2014. Most are scheduled to be in operation by mid-2013. They'll all produce profits and help fund higher limited partner cash distributions in the next two to three years.

2. Is there too much commodity price risk in the MLP's revenue stream?
No. For 2011, DPM's gross margin was 60% fee-based and 40% commodity-price-based. But most of that commodity price exposure is hedged (protected from risk). Just 12% of DPM's gross margin this year is exposed to commodity prices and unhedged. That's very minimal exposure, and should give unit holders peace of mind that the source of their cash distributions is well-protected.

By 2015, DPM expects its gross margin to be as high as 80% fee-based. Much of the remaining portion will be hedged. I doubt DPM will ever have much direct exposure to commodity prices. That should help keep a steady stream of cash distributions coming to unit holders no matter what the commodity does.

3. Does the MLP consistently generate positive net cash flow from operations?
Yes. In 2011, it generated $204.1 million of net cash flow from operations. And it generated positive net cash flow from operations in nine of the last 10 quarters. This is strong. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.

4. Does the partnership have a history of increasing annual distributions?
Yes. DPM declared its first quarterly cash distribution in February 2006. It has raised its cash distribution every year since. Since going public in 2005, DPM has raised its cash distribution 18 out of 26 quarters. It currently yields 6%. Management projects it will increase its cash distribution by about $0.01 per quarter during 2012 and 2013.

5. Are distributions being made in excess of distributable cash flow from operations?
No. Like most MLPs, DPM might distribute more than its distributable cash flow every several quarters. But on an annual basis, DPM consistently distributes less than its distributable cash flow.

6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. In the eight quarters through June 30, DPM distributed 84% of distributable cash flow from operations. That's a great number. It'll move up and down over time, but we expect it to remain fairly high overall. As you'll see in our answer to question No. 7, it's good that DPM retains the other 16% of its distributable cash flow rather than paying more of it out to shareholders as a dividend.

7. Is management generating an acceptable return on any cash it retains?
Yes. For every $1 it retained in the eight quarters through June 30, DPM grew unit holder equity by $8.80. That means unit holders basically made 8.8 times their money on their investment. That's what DPM has done recently with the 16% of distributable cash flow it's retained in the business. This is a phenomenal performance.

DPM won't always be able to create $8.80 of shareholder value for every $1 it retains. But it should be able to grow net worth faster than other MLPs because of the extra opportunities it'll be afforded by its general partner like the "drop-down" transactions and long-term contracts for the use of DCP Midstream, LLC's pipelines and processing facilities.

We normally don't recommend paying more than 10 times distributable cash flow from operations for MLPs. Our experience tells us that's a cheap price. Due to its massive wealth-creation ability, we're willing to recommend you pay as much as 12 times distributable cash flow from operations for DCP Midstream.

BUY DCP Midstream Partners L.P. (NYSE: DPM) up to $44.

One of the Biggest Natural Gas Processors in the Country
ONEOK Partners L.P. (NYSE: OKS) is one of the biggest publicly traded master limited partnerships in the U.S. OKS is in three businesses: natural gas gathering and processing, natural gas pipelines, and natural gas liquids (NGLs). And it's one of the biggest U.S. companies in all three businesses.

OKS owns 15,900 miles of pipelines for gathering natural gas from six producing basins in Oklahoma, Kansas, North Dakota, and Wyoming, 14 active processing plants with the capacity to process 860 million cubic feet per day of natural gas and 7,100 miles of transportation pipelines with a peak capacity of 6.5 billion cubic feet her pay. Its transportation business is mostly fee-based, and has little exposure to commodity price risk.

It also owns one of the biggest NGL systems in the country. OKS' NGL system connects natural gas liquids supply in the Mid-Continental and Rocky Mountain regions with key market centers in the Gulf Coast and around Oklahoma. OKS' NGL gathering pipeline system connects to about 100 different natural gas processing plants... 90% of which are in the Mid-Continental region (Texas, Oklahoma, Kansas). It also includes:

• 549,000 barrels per day of fractionation capacity.
• 9,000 barrels per day of isomerization capacity.
• 23.2 million barrels of NGL storage.
• 3,660 miles of NGL distribution pipeline with 774,000 barrels per day capacity.
• 3,280 miles of NGL gathering pipeline with 842,000 barrels per day capacity.
• 50% equity interest in the Overland Pass NGL pipeline system in Kansas, Wyoming and Colorado.
  
  

Over half ($3.6 billion-$4.2 billion) of OKS' growth projects through 2015 are focused in the Bakken shale in North Dakota and Montana – one of the biggest oil shales in the country. The Bakken also promises tons of natural gas supplies.

OKS is already the largest independent processor of natural gas in the Bakken region. It's got four existing processing plants in the area, and its planning four new ones. And it owns 50% of the Northern Border pipeline, which goes right through this area. The oil in this region also has a very high NGL content, of 8-13 gallons per thousand cubic feet of natural gas.

One of OKS' biggest new investments in the Bakken region is the $1.8 billion it's planning to spend on a 1,300-mile crude oil pipeline in the Bakken region, called the Bakken Crude Express Pipeline. Construction is scheduled to begin in late 2013/early 2014. It should be completed by early 2015. It'll extend from North Dakota, south through Wyoming to Colorado, then southeast through Kansas to Cushing, Oklahoma. More than 80% of this new pipeline will parallel OKS' existing and planned NGL pipelines.

OKS' general partner is owned by its parent company, ONEOK (NYSE: OKE). OKE is a Tulsa, Oklahoma-based natural gas utility serving Texas, Oklahoma, and Kansas. It owns a 2% general partner interest and 100% of OKS' 11.8 million outstanding Class B units. (The ones you can buy are the Class A units.) OKE's Class B units give it the right to receive a distribution on its units equal to 110% of limited partner distributions.

OKE is a shareholder-friendly company, so it has waived its right to receive 110% of the limited partnership distributions. I expect it to continue to waive this right for several more years, as the company continues to grow. Let's see how it stacks up against our MLP criteria.

1. What are the prospects for future growth?
OKS has announced roughly $5.7 billion-$6.6 billion of new growth projects through 2012. As of late August 2012, it had a backlog of more than $2 billion in unannounced growth projects.

2. Is there too much commodity price risk in the MLP's revenue stream?
No. For 2012, OKS expects to generate only about 43% of its profit from sources of revenue exposed to commodity price risk. Much of this risk is hedged with futures contracts. This leaves 57% of revenue free from commodity price risk.

3. Does the MLP consistently generate positive net cash flow from operations?
Yes. OKS's cash flow generation is strong. In 2011, it generated $1.13 billion of net cash flow from operations. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.

4. Does the partnership have a history of increasing annual distributions?
Yes. Since the first quarter of 2006, cash distributions have grown at an annual rate of about 8% a year. But that's accelerating... OKS expects to continue with 2.5% per quarter increases in cash distributions through the end of 2012. It expects to deliver 15%-20% annual growth in cash distributions in 2013 and 2014. As of October 2012, OKS pays out a 4.4% dividend yield.

5. Are distributions being made in excess of distributable cash flow from operations?
Overall, no. Like other MLPs on our list, every now and then you'll see a quarter or two where the distribution exceeds distributable cash flow. But most years, distributions will not exceed distributable cash flow.

6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. In the eight quarters ending June 30, 2012, OKS distributed 69% of distributable cash flow. That's a strong number.

7. Is Management generating an acceptable return on any cash it retains?
Yes, it's excellent. For every $1 it retained in the eight quarters ending June 30, 2012, OKS increased unit holder equity by $1.59. That means OKS is able to invest $1 and create $1.59 of unit holder value. Not many companies can do that.

OKS is an excellent investment, with a strong history of creating shareholder value, and providing a steadily increasing income stream. As of October 2012, OKS has been trading below 10 times distributable cash flow per unit – our main criteria for setting maximum buy prices. But we also like to see MLP yields of 4% or higher than the 10-year Treasury yield. We believe that helps reduce the risk of owning MLPs.

OKS is trading at a yield of about 2.65% above the 10-year Treasury yield recently. That's too low. Based on these valuations, we don't recommend opening a position in OKS until the stock drops to $57 or below.

BUY ONEOK Partners L.P. (NYSE: OKS) up to $57.

A Corner of the Energy Boom You Don't Hear Much About
Magellan Midstream Partners (NYSE: MMP) is one of the largest liquids pipeline owners in the U.S. It owns the longest refined petroleum products pipeline system in the country. Refined products include gasoline, diesel fuel, and jet fuel.

Magellan also transports crude oil. Magellan's pipelines distribute products from over 40% of the country's crude oil refining capacity. Magellan also has the capacity to store over 75 million barrels of liquids at various locations around the country. Magellan's pipelines can tap into more than 40% of U.S. refining capacity. It can store over 75 million barrels of petroleum products such as gasoline, diesel fuel, and crude oil.

Magellan's petroleum pipeline system accounts for roughly 75% of its operating profit. Its petroleum storage terminals account for roughly 23% of operating profit. It also owns an ammonia pipeline system that accounts for about 2% of operating profit. MMP's petroleum pipeline system is about 9,600 miles of pipeline that run straight up the middle of the country, from Texas to Minnesota. Connected to this system are 50 storage terminals with 39 million barrels of storage capacity.

Magellan is planning a major new pipeline from the Permian Basin to the Gulf Coast of Texas. At an expected cost of $375 million, it's the largest new growth project in MMP history. The finished, upgraded pipeline will send crude oil from the Permian Basin region to the Gulf Coast. It'll also send refined products (like gasoline and diesel fuel) from the Gulf Coast as far west as El Paso, on the westernmost tip of Texas.

MMP is also proposing to partner up with global energy giant Occidental Petroleum to build a 400-mile crude oil pipeline from Colorado City, Texas to the Texas Gulf Coast area. If the project gets approved, it's expected to be operational by mid-2014.

MMP also owns seven large storage terminals in Cushing, Oklahoma (one of the largest delivery/distribution hubs for crude oil in the world)... Corpus Christi and Galena Park on the Gulf Coast of Texas... Gibson and Marrero, Louisiana Gulf Coast... Wilmington, Delaware... and New Haven, Connecticut. These terminals have a total capacity of 36 million barrels of storage. This is a good business.

MMP also owns 27 storage terminals (totaling 5 million barrels of storage capacity), located along four pipelines owned by other companies, from the Texas Gulf Coast up the east Coast as far north as Virginia, and from Texas northward as far as the Illinois shore of Lake Michigan.

Like Enterprise Products Partners, MMP does not have a general partner. So unit holders will realize 100% of the benefits of growth in distributable cash flow. Now let's see how MMP stacks up against our MLP criteria.

1. What are the prospects for future growth?
Excellent. As of August 2012, Magellan has $700 million worth of new expansion and growth projects currently underway. Another $500 million of new expansion/growth projects are under consideration.

In the last eight years, MMP invested $2.5 billion in new growth projects and acquisitions. That's just over $300 million per year on average. So it's investing at more than double that rate today. The company is currently spending $375 million on the largest single expansion project in its history. There's plenty of growth now at MMP, and plenty more to come in the future.

2. Is there too much commodity price risk in the MLP's revenue stream?
No. As of June 30, 2012, roughly 82% of MMP's operating profit came from fee-based, low-risk businesses with no commodity price risk.

3. Does the MLP consistently generate positive net cash flow from operations?
Yes. It's one of the most consistent net cash flow generators. It's generated positive net cash flow from operations every one of the last eight quarters. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.

4. Does the partnership have a history of increasing annual distributions?
Yes. It not only increases annual distributions almost every year but it has increased its distribution every quarter for the last 10 quarters in a row (through the August 2012 distribution). As of October 2012, it pays a dividend yield of 4.3%.

5. Are distributions being made in excess of distributable cash flow from operations?
Like some of our MLPs, Magellan might distribute more than its distributable cash flow every several quarters. But not frequently enough to cause concern about the strength of the dividend.

6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. MMP paid out 69% of its distributable cash flow in the eight quarters ending June 30, 2012.

7. Is management generating an acceptable return on any cash it retains?
Usually, but not always. For every $1 per share of cash retained in the eight quarters ending June 30, 2012, MMP grew net worth by $0.68. We think Magellan's massive new $375 million crude oil expansion and pipeline reversal project will put its wealth generation squarely in the black.

Overall, when you look at Magellan's history of income generation and its excellent growth prospects, it's a good A.O.P-style investment. It should provide unit holders with a growing income for many years to come.
Magellan Midstream Partners, L.P. doesn't drop into buy range often but when it does, pounce.

At the time, MMP is well above our maximum buy price of $33 per share. Keep an eye on it.

A Desired Giant in Energy Transport and Storage
We've already discussed crude oil carrier Sunoco Logistics Partners (NYSE: SXL) in our section on Energy Transfer Partners. Energy Transfer recently SXL's general partner Sunoco (NYSE: SUN). In fact, the main reason Energy Transfer bought Sunoco was to get control of SXL. Why? Well, just look at SXL's assets. SXL is in several related energy transportation and storage businesses:

• SXL owns more than 5,400 miles of crude oil pipelines in Texas, Oklahoma, and the Gulf Coast.
• It owns 2,500 miles of refined product pipelines in the Northeast, Midwest, and Gulf Coast regions.
• It buys crude oil and sells it to refineries.
• It owns several minority stakes in pipelines in these regions and the Pacific Northwest.
• It owns and operates 10 million barrels of refined product storage capacity.
• 22 million barrels of oil storage at the Nederland Terminal, Texas Gulf Coast.
• 5 million barrels of oil storage, Eagle Point Terminal, New Jersey.
• 1 million barrels of liquefied petroleum gas near Detroit.
  
  

That's more than 7,900 miles of pipelines and 39 million barrels of storage. It's a lot of moving parts, but SXL's basic services are the same as all the other pipeline companies: transportation and storage of energy products. When Energy Transfer acquired Sunoco, it wanted to get control of SXL's assets. But there's one asset in particular we believe has excellent growth potential: the West Texas Gulf pipeline.

The West Texas Gulf pipeline originates in the middle of one of the biggest oil discoveries in U.S. history: the Cline shale in the Permian Basin of west Texas. It stretches from Colorado City, Texas (near the eastern New Mexico border) to its Nederland Terminal storage and distribution facility on the Gulf Coast. (More on Nederland in a minute.)

Cline is still mostly off the world's radar screen... But we know a Texas oil tycoon with decades of experience who thinks Cline will ultimately produce a total of 35 billion barrels of oil, based on current drilling technology and oil prices. That's more than the three largest oil shales in the country (Monterey in California, Bakken in North Dakota, and Eagle Ford in Texas).

The Cline play has already attracted major oil and gas producer Devon Energy. Devon will drill 15 wells on its 500,000-acre position in 2012. We expect that to attract several more major oil companies. All of this attention will grow the Cline region's production and that's great news for SXL.

In late June 2012, SXL announced plans for a new project to transport crude from North and West Texas to the Gulf Coast. The project is called Permian Express, named for the Permian Basin. Permian Express will happen in two phases.

• Increasing pipeline capacity to add another 150,000 barrels per day of oil transportation out of the Permian region and to the Gulf Coast.
• Connect pipelines near the Cline to existing Sunoco pipelines West Texas and Louisiana. This would add yet another 200,000 barrels per day of oil transportation to the region.

SXL is well-positioned to deliver large amounts of crude oil to Gulf Coast refiners. Delivering crude oil to this region is a no-brainer. The Texas Gulf coast is the World Dominator of oil refining regions. Along the 50-mile stretch of coastline from around Texas City moving east toward Louisiana, you'll find the world's largest concentration of oil refineries, petrochemical companies, and oil storage and distribution facilities in the country.

Aside from the West Texas Gulf pipeline and the growth potential it represents, SXL owns another highly valuable asset on the Gulf Coast: its Nederland Terminal. It lies in the heart of the Gulf Coast refining region. Nederland is the destination for SXL's crude oil from North and West Texas. Nederland can deliver up to 2 million barrels per day to any of the following:

• ExxonMobil's 2,400-acre refinery, chemical and lube plant complex in Beaumont, Texas.
• Valero Energy's 4,000-acre 310,000 barrel per day Port Arthur, Texas refinery complex.
• France's Total SA's 174,000 barrel/day refinery.
• Shell Oil's Houston refineries.
• Two Department of Energy Strategic Petroleum Reserve facilities.
  
  

Those are some serious customers. They'll want access to the Cline discovery once it starts producing large amounts of crude oil. And SXL is poised to provide that access. Now let's see how SXL stacks up against our MLP criteria.

1. What are the prospects for future growth?
Now that SXL is controlled by another of our recommendations (Enterprise Products Partners), its prospects for future growth have improved. SXL is now part of a larger, more-focused entity than when it was owned by Sunoco. Given the enormous potential of the Cline shale and SXL's ownership of the Nederland Terminal on the Gulf Coast, we believe SXL's new Permian Express project is likely the beginning of a major growth effort in West Texas.

2. Is there too much commodity price risk in the MLP's revenue stream?
No. About one-third of SXL's 2011 earnings before interest, taxes, depreciation, and amortization (a standard cash flow measure used by some MLPs and companies) was exposed to commodity price risk. As with most of our MLPs, we expect this to stay about where it is or possibly even improve with time.

3. Does the MLP consistently generate positive net cash flow from operations?
Yes. SXL has generated positive net cash flow from operations in seven of the eight quarters through March 31, 2012. SXL generated a record $166 million in distributable cash flow in the second quarter of 2012. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.

4. Does the partnership have a history of increasing annual distributions?
Yes. SXL is a world champion at increasing distributions. As of August 2012, it had raised its distribution 29 quarters in a row. That's every quarter for more than seven years in a row.

5. Are distributions being made in excess of distributable cash flow from operations?
No. It distributes a little more than half of its distributable cash flow from operations.

6. Does the MLP distribute the majority of its distributable cash flow from operations?
Nearly. In the eight quarters ending June 30, 2012, SXL distributed 46% of its distributable cash flow from operations. The number fluctuates somewhat, but we expect distributions to rise now that SXL is controlled by Energy Transfer (which distributes 100% of its distributable cash flow from operations).

7. Is management generating an acceptable return on any cash it retains?
Not at the moment. For every $1 of distributable cash it retained in the eight quarters ending June 30, 2012, SXL generated $0.96 of net worth. But we expect this number to rise in the near future as new growth projects come online.

Sometimes, MLPs retain more cash to fund new growth efforts. It takes a little time for the new investments to be made and for it to produce a return. Recently, SXL has been retaining more cash than usual to fund new growth efforts. I expect these efforts will generate a good return, eventually. It takes time for pipelines to be built. For now, we're willing to look past the current situation to the future growth prospects represented by the extra retained cash even if it requires us to answer no to this question. I believe we'll be answering yes before long.

Overall, SXL exhibits the characteristics of a safe MLP investment with excellent growth prospects and stacks up well against our model.

BUY Sunoco Logistics Partners L.P. (NYSE: SXL) up to $66 per share.

Please note: If you buy Energy Transfer Partners, you'll automatically be invested in SXL, since ETP owns a controlling stake in SXL. You may not want to "double up."
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The financial results that qualify a stock for our criteria are constantly changing. We think the six companies in profiled here will continue to do what they've done in the past: consistently generate results that (almost always) meet our criteria.

It's normal for our top six MLPs to change from time to time and if one does not currently pass our criteria will get its act together or one that does pass will have a bad year and fall off the radar. Overall, we think we've developed a highly powerful tool that lets us reduce a large and growing number of possible MLP investments down to a small group. For now, keep these six MLPs on your watch list and when they are in buy range... pounce!

That's what investing is all about. It's about understanding the overall trend in place and then doing your homework until you find just the right opportunities to take advantage of that trend. I hope you'll use this information as an important point for building your own MLP portfolio. It can help you earn a large and growing income for years to come.
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INVESTOR TIP
Do the research to find out if your MLP investment offers a DRIP (dividend reinvestment plan). DRIPs can increase your dividend income exponentially with a compounded rate of return.

I wanted to stay focused on MLPs and the criteria you should use to aid in your selection. You must check out Vanguard Natural Resources, LLC (Nasdaq: VNR). VNR is a publicly traded LLC (LLCs are similar to MLPs).

VNR doesn't own stakes in other publicly traded partnerships, so it shouldn't be an additional concern for your tax professional to sort out. Even so, if you put up with any extra paperwork, you can earn high yields and defer tax payments for years. It's a personal decision. For many investors, the benefits outweigh the extra work at tax time.

BUY Vanguard Natural Resources, LLC (Nasdaq: VNR) up to $30 a share