Bill Gross knows a thing or two about yield-focused investments. He co-founded PIMCO, where he became a legendary bond investor. According to Forbes, Gross, known as the "Bond King," is worth about $1.7 billion.
Gross had recently been pounding the table for another yield-focused investment vehicle: master limited partnerships (MLP). Given their high tax-advantaged yields and attractive valuations, he believed MLPs offered compelling total return potential.
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However, his enthusiasm for MLPs has started to cool. He recently posted on X:
MLP pipelines seem to be topping. Hold if you like 6.5% tax-deferred yields. Sell if you own too much. I own less than I did 2 days ago.
Here's a look at why Gross has changed his view on MLPs, and whether investors should follow his lead and sell.
Red-hot dividend stocks
Pipeline stocks have been red-hot over the past year:
A big catalyst fueling their surge is the expected resurgence in natural gas demand in the coming years. Demand drivers like artificial intelligence (AI) data centers, the onshoring of manufacturing, and the electrification of everything have the potential to fuel a significant surge in electricity demand. That should drive meaningful additional demand for natural gas.
Pipeline companies are already starting to capitalize on this surge. For example, leading natural gas pipeline operator Kinder Morgan (NYSE: KMI) has secured enough commercial contracts to sanction three large-scale natural gas pipeline projects totaling $5 billion in costs (for its share of those projects) over the past few months. The company and its peers in the pipeline sector expect to continue approving new expansion projects to support the anticipated surge in gas demand.
This AI-fueled growth resurgence has caused investors to pile into pipeline stocks. Because of that, they now trade at much higher valuations (and lower dividend yields) than they did a year ago.
Time to sell?
Bill Gross' comments indicate his belief that the rally in pipeline stocks has run its course. This means he's selling down some of his MLP investments.
However, he still favors MLPs because they offer relatively more attractive income streams (especially given their tax advantages). He notes that investors can still earn an attractive yield at today's level of 6.5% (or better in some cases).
For example, that's the yield of leading MLP Energy Transfer (NYSE: ET), which had been a favorite of Gross in the past. That's a very attractive yield compared to the S&P 500 (SNPINDEX: ^GSPC) (1.2%) and pipeline corporations (e.g., Kinder Morgan yields 4.3%).
Energy Transfer currently expects to increase its high-yielding payout by 3% to 5% per year. It has several growth projects lined up, including the recently approved $2.7 billion Hugh Brinson natural gas pipeline. Energy Transfer is also working to develop a major liquefied natural gas (LNG) export project. These projects could give the MLP the fuel to grow its high-yielding distribution for years to come.
Western Midstream Partners (NYSE: WES) is another MLP favorite of Gross. It offers an even higher yield of 8.7%. Western Midstream has significantly enhanced its operations and balance sheet in recent years through a series of acquisitions and asset sales. Those moves have increased its financial flexibility, allowing it to significantly increase its distribution.
MPLX (NYSE: MPLX) is another high-yielding MLP (7.2% yield). The company has grown its big-time payout at a more than 10% compound annual rate since 2021, fueled by its strong financial profile and rising cash flow. MPLX has lots of growth lined up. It recently added several more expansion projects to its backlog, extending its growth outlook through 2029. Because of that, it should have the fuel to continue increasing its high-yielding payout at a healthy rate.
While this trio of MLPs have all rallied sharply over the past year, they're still compelling investment opportunities for income-focused investors. They have strong financial profiles, which should allow them to continue growing their midstream operations and high-yielding distributions. Because of that, they're great sources of passive income for investors, especially those seeking tax-advantaged income (and are comfortable with the added tax complexities of MLPs that send their investors a Schedule K-1 federal tax form each year).
Still attractive, even after the run-up
Some investors might want to cash in on their MLP investments after last year's big run. That makes sense if they're now an outsized portion of your portfolio. However, while they're not the screaming buys they were this time last year, they're still attractive investments if you're seeking a lucrative and steadily rising income stream.
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Matt DiLallo has positions in Energy Transfer, Enterprise Products Partners, and Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners and Oneok. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
