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Dividend-rich oil and energy MLPs are investment bargains now

Crude oil and many energy stocks are nowhere near rebounding.

In fact, these stocks likely will continue to decline in 2015.

But in the past two weeks, a sharp selloff in pipeline MLPs has created a big opportunity for investors who can stomach short-term volatility in pursuit of long-term investments with massive income potential.

Consider the Alerian MLP ETF AMLP, +1.38% , a leading master-limited-partnership fund with just shy of $8 billion in assets under management. A recent selloff saw Alerian briefly touch under $14 a share — the fund’s lowest level since it launched in August 2010. As a result, the fund now yields about 7.6% annually.

There are many reasons for the decline, not the least of which is soft energy pricing, and there are no guarantees that there won’t be further pain in the short-term given the sector’s bleak outlook.

But long-term dividend-focused investors looking to stake out a position in these income-generating MLPs would be wise to consider buying or adding to positions in these stocks now — particularly the “toll taker” partnerships focused on energy infrastructure and pipelines.

Here’s why I’m taking a serious look at the MLP space and why you should too:

Distributions are rising at many MLPs

A look at some popular MLPs can be depressing if you’re only looking at share price. But remember, these companies are basically pass-through entities where the profits are delivered directly to “unitholders” in the partnership. That means a growing level of distributions indicates better cash flows and a healthier underlying business.

Viewed this way, it’s puzzling that MarkWest Energy Partners LP MWE, +0.64% has hiked its distribution from 76 cents quarterly at the start of 2012 to 92 cents now — a 21% increase in less than four years — while shares are actually slightly in the red over that time frame due to recent declines.

Similarly, pipeline giant Energy Transfer Partners ETP, +4.69% has seen distributions increase from 89.38 cents in mid-2013 to $1.035 currently — a roughly 16% jump in two years — while the stock is down by double-digits in the past 24 months.