I love taking advantage of market inefficiencies or quirks; spinoff mispricings, CEF discounts, etc. Its one of the most entertaining and profitable of past times. I’ll share one with you today in the MLP sector and I hope it makes you some money in the future. Lets dive in.
What if I told you the majority of historical MLP returns, since 1995, have come in just 4 months of the year? And its the same 4 months every year in which some key event happens. Take a look at the chart below.
The chart gives it away but the best months for MLP returns are the months in which the quarterly dividends are paid. January is typically the best month with average returns of 4.6% for the month. October is the lowest at an average of 2.5% for the month but still pretty darn good for one month. And now we’re just coming up to October. This is investing with an edge. You can stack the odds in your favor with this knowledge no matter if your looking for a trade or to add to your long term MLP holdings.
There are quite a few MLPs that look attractively priced at the moment and in fact the whole sector is still a good value, better than other high yield sectors like junk bonds or even corporate bonds. But that’s a topic for another post. A few MLPs that have me interested in buying or adding to an already existing position are MWE, WPZ, and KMR. Looking at one example, a chart of KMR – this is a good risk/reward setup given that data just presented in this post. Coiled spring anyone?
Remember, these are probabilities based on historical patterns not future certainties so risk management is key. IMO there is a good chance for a break out to retest the previous high of $81. I’d use $73-$74 as my downside risk. $6 of upside with $1-$2 of downside with a $1.23 dividend thrown in to boot to be declared around mid Oct with an ex date at the end of the month. Pretty good odds in my book.
Disclosure: long WPZ, KMI, KMR