But not all income-oriented stocks underperform in a rising rate environment, and the recent sell-off is an ideal opportunity to buy into some names such as master limited partnership (MLP) MPLX (NYSE: MPLX).
Refining giant Marathon Petroleum (NYSE: MPC) is the general partner of MPLX and owns close to half of the outstanding units. In fact, Marathon placed some of its assets in MPLX before the initial public offering last October. The list of assets includes an ownership stake in 962 miles of crude oil pipelines and 1,819 miles of refined product pipelines located across seven Midwestern states, Texas and Louisiana. In addition, MPLX owns a crude oil barge loading dock on the Mississippi River in Illinois, oil and refined products storage facilities in Illinois and Indiana, and a butane storage cavern in West Virginia.
Pipelines and storage facilities are some of the lowest-risk assets an MLP can own, and Marathon Petroleum, MPLX's "Rich Parent," guarantees cash flows from its current assets through a series of five- to 10-year contracts with guaranteed minimum fees.
For assets covered by these contracts, MPLX has no exposure to commodity prices -- whether oil is at $50 per barrel or $150, Marathon still pays a fixed fee to MPLX for the right to utilize its storage and transportation assets.
Best of all, Marathon owns 5,000 additional miles of oil and product pipelines, three liquefied petroleum gas storage terminals in West Virginia, 62 refined product terminals, a significant fleet of crude oil barges, and a minority stake in the pipelines now controlled by MPLX.
These assets are worth more than MPLX's $2.6 billion market capitalization and would be a perfect fit for the MLP's portfolio. I believe Marathon will gradually sell the majority of these assets to the MLP in a series of drop-down deals over the next three to five years. In fact, these drop-downs have already started: In May, MPLX purchased an additional stake in a series of crude oil pipelines and barge loading docks from its parent, Marathon, for $100 million.
This deal was immediately accretive to cash flows and allowed MPLX to boost its quarterly distribution to 28.5 cents, equivalent to a 3.2% annualized yield. I'm looking for MPLX to grow its payout at a 20% annualized pace over the next few years, an advantage that fixed-income products like bonds can never offer.
Buy MPLX under $36.50 a share.
Like MPLX, some of the most successful MLPs often have a wealthy and powerful company backing them -- or what I like to call a "Rich Parent." These "Rich Parent" stocks are one of my favorite ways to profit in the market right now. One is a low-risk play that has already returned 333% since going public in 2008, while another yields nearly 10%.