There’s no doubt about it. As an advisory, MLP Profits is off to a far better start than Elliott and I had any right to expect.

I’d love to be able to give the credit to our superior stock-picking skills. And to be fair, we have been able to pick out a group of extremely solid companies to fill our Aggressive, Growth and Conservative Holdings. That’s a fact which is proven out every time our recommendations post earnings or, better, when they raise their distributions.

We’ve also been able to steer you away from the turkeys that are inevitable in any industry as popular as master limited partnerships (MLP) have become. In the January 28 Viewpoint, for example, Elliott highlighted two MLPs we wouldn’t touch with a 10-foot pole: Capital Products Partners LP (NSDQ: CPLP) and the ever popular Cheniere Energy Partners LP (NYSE: CQP).

Since then Capital Products has turned sharply lower on a distribution cut, which will almost surely have to be repeated later in the year due to atrocious coverage ratios. Cheniere, meanwhile, continues to attract buyers as it completes facilities for liquid natural gas (LNG) imports that may never be used with the US awash in shale gas. That plus the fact that its parent draws a CCC rating is a bright red warning flag for all investors to see, though most won’t heed it until too late.

We continue to rate roughly a third of MLPs in our coverage universe as sells. Some, like these two, should be avoided on the basis that their underlying businesses are chronically weak. That’s, by the way, always a reason to head for the exits, no matter what the investment in question.

Others are in danger of running afoul of the continued push in Washington to slam the door on “carried interest,” a preferred method of hedge funds to avoid US taxes that’s also employed by financial constructs masquerading as MLPs, such as widely touted AllianceBernstein Holding LP (NYSE: AB). AllianceBernstein, in particular, has enjoyed a mighty recovery from the financial crisis low of barely $10 a unit it hit a year ago. But it would give that up and a whole lot more if Congress again takes up this intensely populist measure in an election year. And that’s certainly not anything for income investors to be involved with.

Unfortunately, we can’t take credit for the most important factor behind MLP Profits’ returns since our May 2009 inception: a rising tide that’s basically raised all boats, from the good to the bad and the ugly.

MLPs have rallied for the same reasons that first induced us to launch this service. Number one is generous yields backed by strong businesses that are systematically increased over time. Number two is the fact that those yields are tax advantaged at a time when the risk of higher taxes is at its greatest in decades.

MLPs’ ability to declare distributions as “return of capital” in effect allows investors to defer taxes on them until they sell, by subtracting them from the cost basis. At that point, the tax is paid as a capital gain. And willing an MLP to an heir can defer taxes indefinitely, as cost basis adjusts to the then-current price.

MLPs, however, no longer measure up to the third reason we launched this product. That is, they’re no longer deep value. Rising cash flow and dividend growth will still push up their prices over time. And as they proved during the great crash of 2008 and the subsequent recession, there are few better investments to hunker down with during a bad environment.

But with few exceptions, no one should expect the kind of the windfall gains we scored over the past 10 months to repeat themselves over the next 10. In fact, investors should brace themselves for what inevitably happens after a torrid rally in a still weakened economy: A meltdown in MLPs that don’t measure up as businesses.

As we’ve pointed out on numerous occasions, secondary equity offerings–i.e. sales of units by MLPs to raise money for growth–are superb opportunities to buy first-rate MLPs. Mainly, they’re practically guaranteed to induce nervous investors to sell, driving down prices. And because the money raised is almost always used to buy or build cash-generating assets at prices that guarantee accretion, successful equity issues are also typically the harbinger of future distribution growth.

If you’re still light on any of our holdings, the aftermath of an equity issue is always the ideal time to rectify that with a purchase. On the other hand, don’t assume that a public offering by just any MLP is a buying signal, particularly with weaklings trading at relatively high levels. Rather, an offering may in fact be a signal to get out while the getting is good.

It’s sometimes easy for investors to forget. But this is a market dominated by institutional traders who deal in sectors first and individual investments second. When a sector is hot, everything gets bid up, and there’s nothing like a rising share price to convince anyone that risks are insignificant. Only when circumstances take a turn for the worse do investors realize their error, and by then the institutions bidding things up are driving them down with their selling.

Your only protection as an investor is to make sure of the underlying businesses of the MLPs you own. If the business is sound and growing, the unit price is going to go higher over time, even as it pays you a rising stream of distributions. If it’s not, the distribution will stagnate, at best. Moreover, it will always be at risk of being cut, triggering a waterfall decline in the MLP’s unit price.

A rising price environment is not the time to abandon the discipline of buying only quality MLPs. Rather, it’s time to ensure everything you own is a high-quality MLP. That way, you’ll continue to profit as long as the rally lasts. But you’ll be also be protected by a rising dividend stream if conditions sour.

Over the past several weeks, we’ve analyzed the fourth-quarter and full-year 2009 results of MLP Profits Portfolio recommendations and what they mean for our returns going forward. We’re still waiting on EV Energy Partners LP (NSDQ: EVEP) to report on March 16. But the rest have now finally turned in their numbers, and the results are as solid.

Last week, Elliott rounded up the numbers for the Conservative Holdings, a group of fee-generating businesses that continue to do their job of adding new cash-producing assets and raising distributions. Prices aren’t as low as they once were, but they’re still generally below our buy targets and therefore continue to rate values, particularly for those who haven’t bought them yet.

Our Growth Holdings are slightly higher up the risk scale, combining what are mostly fee-generating businesses with some exposure to commodity prices. This week, one of their number, DCP Midstream Partners LP (NYSE: DPM), reported its fourth-quarter and full-year 2009 numbers.

The key number was DCP’s distribution coverage ratio of 1.45-to-1, a sharp improvement from that of prior quarters as well as the full year ratio of 1.2-to-1. That kind of powerful protection should not only lay to rest any fears that the MLP’s distribution is at risk, but it opens the door to a resumption of payout growth that’s been stalled since a penny per share hike in August 2008.

That’s in fact what’s behind DCP’s unit price surge to new highs in recent weeks. The current price is now in the low 30s, well above our prior buy target of 28. That’s normally when we say enough is enough and counsel waiting for a lower price to buy in. This is one case, however, where the robust earnings results appear to justify a higher price.

The key is surging global demand for natural gas liquids (NGL) as a far cheaper alternative to oil. DCP has been quite active in this area, closing a $22 million purchase of a 350-mile NGL pipeline in January and launching an $18 million expansion of those assets to be completed in early 2011. Strong performance of the wholesale propane and NGL logistics segments, increased NGL production and the addition of NGL assets were the most important factor behind the near tripling of fourth quarter distributable cash flow.

NGL demand is being driven by the fact that natural gas–its primary feedstock–is historically cheap in North America relative to oil. And with this continent awash in shale gas and demand for oil surging in developing Asia, it’s likely to stay that way, making it increasingly attractive as a substitute for a whole range of uses. America has also become a primary exporter of NGL, thanks to unsurpassed refining capability, further driving demand.

NGL isn’t DCP’s only business. Wholesale Propane Logistics is also important to returns and contributed to the upturn as well. The MLP also operates fee-based gathering and treating assets in Michigan, a very secure business. And it operates a gathering system in East Texas, as well as other assets.

It’s the NGL leverage that provides the excitement here, however, and is the reason for our improved buy target on DCP Midstream Partners LP to 30, though that’s as high as we’d take it until there’s an actual distribution increase.

Here’s a brief rundown of results for the other MLPs that have reported. We’ll have a more detailed discussion of that the numbers mean when we review the individual portfolios in coming weeks. In the meantime, stick to our buy targets.

Legacy Reserves LP (NSDQ: LGCY) posted a slight uptick of 0.8 percent in its fourth-quarter production versus 2008 levels, measured in barrels of oil equivalent (boe). Coupled with better realized selling prices, the result was a 17.4 percent increase in revenue and a 23.5 percent boost in operating income. An unrealized loss on commodity derivatives took headline net income into the black. However, the only number that counts for dividends–distributable cash flow–rose 8.2 percent.

The big event going forward for 2010 is likely to be the acquisition of long-lived producing properties in Wyoming that was executed in December. That ultimately means a higher cash earning base, though much depends on what happens to energy prices. Our buy target for Legacy Reserves LP remains 21.

Linn Energy LLC (NSDQ: LINE) also came in with solid results for fourth-quarter and full-year 2009. On the reserves front, the company replaced 112 percent of 2009 production through the drillbit at the economic finding and development cost of $1.59 per thousand cubic feet. Proved reserves were boosted 3 percent as was average daily production. That added up to a full-year increase in cash flow of 10 percent and a distribution coverage ratio of 1.14-to-1.

Linn has hedged 100 percent of all oil, NGL and natural gas production through 2011 at good prices, as well as 65 percent of current oil output for 2012 and 2013. That should lock in enough cash flow to fund development and the dividend going forward, putting Linn in prime position to profit from higher energy prices. We continue to like Linn Energy LLC up to our buy target of 28.

Regency Energy Partners LP (NSDQ: RGNC) enjoyed a 4.1 percent sequential increase in its fourth-quarter cash flow over third-quarter levels. That’s a direct result of the ongoing successful expansion of its gathering and processing systems, transportation and contract compression assets, which are strongly leveraged to energy prices.

Unlike our other MLP favorites, Regency doesn’t currently cover its distribution with distributable cash flow, due to the ongoing costs of its Haynesville Expansion Project. Fourth-quarter coverage, for example, was just 0.65-to-1, while full-year was 0.87-to-1. Coverage is expected to move well over 1-to-1 in 2010 as volumes ramp up at the new systems. But until they do, investors need to be aware of the risks and above all adhere to our buy target of 22 for Regency Energy Partners LP.

Teekay LNG Partners LP’s (NYSE: TGP) big news is its acquisition of three more ships for $160 million, a move that will boost future cash flows by $8 million a year.

The deal induced the LP’s general partner to recommend a 5.3 percent distribution increase to Teekay’s board of directors, who are near certain to approve it.

Fourth-quarter distributable cash flow surged 13.2 percent as the MLP continued to thrive even as other tanker companies flounder. Dividend coverage was a solid 1.39-to-1 in the fourth quarter, before the impact of the acquisition. Teekay LNG Partners LP is now a buy up to 28.

Williams Partners LP (NYSE: WPZ) has now completed its strategic combination with sister LP Williams Pipeline Partners LP (NYSE: WMZ) to form one of the largest MLPs in the US.

At the core are the company’s midstream and interstate gas pipeline assets, which generate fee-based income, with growth augmented by gas-gathering systems where profits are more sensitive to commodity price swings. The new MLP is large enough now to participate in a whole new range of cash-generating projects, including a new Marcellus Shale gathering pipeline.

That’s a good reason to expect continued strong returns, such as those that produced a fat 2009 cash distribution coverage ratio of 1.39-to-1. Williams Partners LP is a buy up to 37.