Make your money grow 7% to 12%

By Michael Brush

Earning enough from your savings to stay ahead of inflation is tough now that prices are rising so fast.

Government bonds? Forget about them. Widely thought to be a safe way to save, they're now a sure way to lose money. With inflation running above 5%, you're out at least 1% to 2% a year with U.S. government bonds because they pay well below 4%.

Savings accounts or certificates of deposit? Good luck finding ones that beat inflation.

But insiders in the energy sector have recently pointed out a great way to earn enough interest to whip inflation, with enough profits left over for a little splurge, even as prices for energy and food go through the roof.

They're snapping up limited partnerships in the energy sector, and for good reasons:

• These little-known investments offer attractive annual yields -- anywhere from 7% to 12% on the ones I suggest below.

• The payouts by energy limited partnerships are increasing, on average, by about 10% a year.

• You can defer taxes on the income for a long time and use the cash to make even more money in the meantime.

• You're likely to see big gains in the shares of the limited partnerships you buy to get at those yields. They may roar back from a severe sell-off.

All told, this is a fairly easy way to make your money earn a double-digit return right now. But watch the details, because doing so is a bit complicated.

The basics

Buying shares of these master limited partnerships, or MLPs, makes you a limited partner in the energy businesses they run -- mostly pipelines with the 12 MLPs I suggest buying. As a limited partner, you get a portion of the profits they are required to distribute each year. One reason they have so much money to give to you is that they don't get taxed.

• Video: Oil, the economy and the markets

Sure, these MLPs carry risks. We will get to those in a minute. But the potential gains on MLP shares in the rebound ahead -- plus those juicy yields –- far more than offset the risks at this point, I believe.

I see four reasons MLP shares (technically called "units") will rebound at some point.

Bashed to smithereens

In part because of exaggerated fears about economic weakness, over the past year MLP prices have been beaten down to extreme lows from which they typically put in phenomenal rebounds. But that's not necessarily a bad thing for us. The more an MLP's shares get hammered, the higher the yield and the more money you get paid for owning them -- as long as you buy them now, when shares are cheap and yields are high.

One way experts gauge how cheap MLPs are is by calculating how much their yields exceed the yields on 10-year Treasury bonds.

Because prices are beaten down, the yields on energy infrastructure MLPs are now up to an average of 8.5%. That's 4.7 percentage points above the 10-year Treasury yield of 3.8%. In the past 10 years, the gap has reached this extreme only three times. Now here's the really good part: Each time, MLP prices rebounded 40%, on average, in the next 12 months, according to Jim Murchie of Energy Income Partners in Westport, Conn., which specializes in investing in MLPs. In the three- and five-year spans after hitting bottom, they've gone up an average of 80% and 129%, respectively, he says.

That's pretty impressive! Sure, there are no guarantees that kind of growth will happen again. But a pretty powerful historical record is working in your favor if you buy MLPs now. The key takeaway: You'll lock in the higher yields if you buy now, whatever happens to the price going forward. Plus you'll probably benefit from advances in MLP shares that should happen sooner or later.

Insiders are buying big-time

This may explain why insiders have been snapping up MLPs. I've spotted a dozen MLPs in the Thomson Financial database, which shows some insiders buying $1 million or more in shares.

Whenever you see insiders move en masse in a sector, it's a good signal the sector is about to turn around. "I think the insiders know they are cheap," Murchie says. "The fundamentals of the pipeline business are very good."

Investors have sold down MLPs in part because of concerns that a very weak economy will reduce energy use so much that demand will slip for the pipelines, storage tanks and processing plants that MLPs operate. I think news last week that second-quarter gross domestic product grew 3.3% should soon begin to convince investors that the economic-disaster scenario is unlikely to play out -- after more than a year of waiting for it. Plus, the demand for energy likely won't go down over the long term.

Continued: Possible end to MLP exodus

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