If you're in your 60s, you've spent most of your adult life focused on building your nest egg. Now, however, things are changing and you're going to need to shift to using your portfolio to supplement your Social Security checks. That means starting to look at income investments like Magellan Midstream Partners, L.P. (NYSE: MMP) and Brookfield Property Partners LP (NASDAQ: BPY), both of which have yields of more than 5%. But there's more to these partnerships than yield because they'll also help you deal with the ravages of inflation. Here's what you need to know to understand why you should be considering buying these two high-yield names.
The ravages of inflation
Inflation isn't normally too big a deal to people in the workforce because wages tend to rise over time. That generally offsets rising costs for everything from food to shelter. Those rising costs are essentially inflation. If you want an example, take a look at something as mundane as bread. A pound of bread cost just about $0.50 in 1980, but by 2017 was up over $1.30. That's inflation, and it has historically risen at around 3% a year. Three percent doesn't sound like much, but the bread example shows that it starts to add up over time.
Income isn't the only building block to focus on when you hit your 60s -- look for dividend growth, too. Image source: Getty Images.
This is why buying an investment that throws off a static income stream is so problematic once you stop working. Over time, a static stream of income will buy you less and less stuff. To counteract that, you'll want to make sure you own a good number of investments that protect your buying power with growing disbursements, like Magellan and Brookfield Property Partners.
The midstream play
Magellan is a large and conservatively run midstream energy partnership. The yield is roughly 5.3% today. It's increased its distribution every quarter since it came public in 2001. The compound annual growth rate of the distribution over that span is an impressive 12%, roughly four times the rate of inflation growth. So there's a really impressive history here.
Magellan's distribution history is impressive. Image source: Magellan Midstream Partners, L.P.
But what about the future? Right now, Magellan is planning on distribution growth of around 8% in 2018. That's backed by roughly $800 million worth of capital spending. It has another $350 million planned for 2019, with the potential for increasing that total by as much as $500 million based on the pipeline of potential projects it has under review. In other words, expect similar distribution growth in 2019.
Magellan has an impressive history of success, with spending of $5 billion on capital projects and acquisitions over the last decade driving its impressive distribution growth. The current list of projects is mostly comprised of expansions at assets where Magellan can see that demand will be strong or they have customers lined up in advance. And the best part is that Magellan is conservatively financed, so it has plenty of spending leeway.
In fact, unlike many peers, including industry bellwether Enterprise Products Partners LP (NYSE: EPD), Magellan hasn't had to sell partner units in a meaningful way since 2009. Selling new units dilutes current unitholders. Magellan has largely been self-funding its growth for years -- something many competitors, including Enterprise Products Partners, are just starting to focus on.
The property play
Brookfield Property Partners is a globally diversified landlord. Its main focus is on office (around 50% of revenue) and retail (approximately 20%) properties, but it also has an "opportunistic" segment (30%) that includes everything from student housing to self-storage. The U.S. makes up most of its business, at around 60% of its portfolio, with assets in Europe, Canada, South America, and Asia accounting for the rest. This worldwide diversification is a unique feature of the partnership when compared to other real estate investment options, which often focus on a single country or property type.
Brookfield Property has a widely diversified portfolio. Image source: Brookfield Property Partners LP.
Brookfield Property has increased its distribution at a compound annual rate of 6% (twice the rate of inflation) since it was spun off from Brookfield Asset Management in 2013. The goal is to grow that distribution between 5% and 8% over the long term, driven by rent increases in the 2% to 3% range, construction, and opportunistic acquisitions. On that last front, Brookfield Property recently made an unsuccessful bid to buy all of mall owner General Growth Properties, a real estate investment trust that it partly owns. (There's likely more news to come on this deal since the two sides are still negotiating, according to Bloomberg.)
There are two things of note about Brookfield Property that should interest income investors. First, the 5% to 8% distribution growth target. That will keep your income growing faster than inflation. The second, however, is that it owns property, which is a physical asset and something of a natural inflation hedge since property values tend to rise along with inflation. Also, although Brookfield Property is a relatively new entity, Brookfield Asset Management has an over 100-year history behind it. In other words, there's no particular reason to worry about Brookfield Property's short history as a stand-alone entity.
Two ways to grow your income
As you move through your 60s, you'll be increasingly concerned about generating income from your portfolio. But don't get so caught up in high yields that you lose sight of the income growth you'll need to keep ahead of inflation. To do that, you'll want to buy investments like Magellan Midstream Partners and Brookfield Property Partners to increase their distributions at an inflation-beating rate while they grow their businesses. If you are at or near retirement, now is a good time to do a deep dive on this pair of high-yielders.
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