One of the most accomplished investors in recent history is Bill Gross. Known as the "bond king", Gross made a name for himself as the founder of Pacific Investment Management Company (PIMCO) back in the 1970s.
While he is no longer part of PIMCO, Gross is still an active investor. Recently, he posted on social media that he sees Western Midstream Partners (WES 1.57%) as the "best of the bunch" when it comes to pipeline master limited partnerships (MLP).
With a juicy dividend yield of 10%, should you follow Gross' lead?
Let's dig into why adding some exposure to the energy sector might be a good idea, and analyze if Western Midstream is a good option for you.
Energy is off to a hot start this year
In general, stocks have gotten off to a great start in 2024. Themes in artificial intelligence (AI) and medical breakthroughs in weight loss treatments have fueled the technology and healthcare sectors this year. These gains have contributed greatly to the S&P 500's year-to-date return of 7%.
But did you know that the energy sector has performed on-par with tech? Industrials, basic materials, and utilities have all performed strongly so far this year, and I think there could be some overlooked opportunities.
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Why are MLPs a good choice for energy investors?
It's important for investors to understand that the energy sector is broad. Moreover, some segments within the industry are generally more volatile and susceptible to macroeconomic factors including inflation and interest rates.
MLPs are a unique breed. As the name implies, these businesses are structured as limited partnerships (LP). They are required to pass through profits and losses to LPs. This is a big selling point for investors as they can deduct certain items to offset capital gains taxes. Furthermore, MLPs pay out generous distributions to their investors -- similar to that of a dividend.
Another reason why MLPs are different than other energy businesses is that they tend to enter into long-term, fee-based contracts. As a result, MLPs are generally more insulated from volatility in commodity pricing, as well as broader themes in the economy or even geopolitical factors that can impact other areas of the energy sector.
Something to think about
The chart below illustrates the quarterly distribution payment for Western Midstream over the last 10 years. With the exception of a cut back in early 2020 -- undermined by the COVID-19 pandemic -- Western Midstream has a history of raising its distribution.
WES Dividend data by YCharts
To me, I think there is something bigger at play here. Remember, Gross is a bond investor at heart. Bonds are some of the most predictable, steady sources of income available to investors -- therefore they are generally perceived as less risky than stocks or other asset classes.
In a way, I think Gross sees Western Midstream as akin to a bond. While there are many other choices in the stock market, opportunities in technology, healthcare, and other sectors can carry significant volatility and unpredictability.
Investors that are looking for steadier opportunities might want to consider MLPs -- and Western Midstream specifically.
First, you're gaining exposure to a high growth industry while also investing in an area that is more immune to macro risks surrounding energy businesses. Second, considering MLPs are required to pay distributions, you have the added benefit of supplementing any gains in the share price with passive income. For investors looking for a healthy combination of growth, dividend income, and predictability, Western Midstream provides the best of all worlds.
