Funeral homes and cemeteries may be unsettling, but shifting demographic trends in the US are undeniable. Investors able to set aside their distaste for the industry have the opportunity for attractive payouts. –The Editors

There are only two certainties in life: death and taxes.

For decades the mortality rate has declined in the US as advancements in medical technology have steadily improved life expectancy. But our population growth is slowing as the leading edge of the Baby Boom Generation–which accounts for roughly a quarter of the population–turns 65 next year. This event will push up the median age of the US population and increase the annual number of deaths.

It’s a somber, but undeniable trend that will make the business of owning and operating funeral homes and cemeteries a growth industry for the next two decades.

Coolheaded investors will find that Levittown, Pa.-based StoneMor Partners LP (NSDQ: STON) fits the bill. The company owns 236 cemeteries and operates an additional 16 on a contract basis for nonprofits and religious organizations. StoneMor also owns 63 funeral homes.

Though StoneMor is a relatively young master limited partnership (MLP)–it was formed in 1999 and went public in 2004–it has upped its payout seven times over the past six years. Currently paying a quarterly dividend of 56 cents, StoneMor offers an extremely attractive 8.8 percent yield.

Yields that high often signal operational difficulties, but that’s not true in this case. StoneMor executes an aggressive growth-by-acquisition strategy, purchasing 17 cemeteries and five funeral homes in the first half of this year alone. After closing a deal, it can take three months to a year for revenue to catch up with costs, making the outfit’s balance sheet appear worse than it actually is.

The upshot is that it allows investors to take advantage of StoneMor’s attractive payouts, which are amply covered by distributable cash flows. And as acquisitions contribute to earnings, there’s opportunity to increase payouts.

In July StoneMor inked a deal to manage three Catholic cemeteries on behalf of the Archdiocese of Detroit. Under the 40-year agreement, the Archdiocese will contribute money to offset the cost of infrastructure upgrades and hiring a sales force for the first several years. Afterward, a portion of profits will be paid out to the Archdiocese. With hundreds of Catholic cemeteries located throughout the US, this deal could open a lucrative market.

Additionally, StoneMor expects to have a large portion of its sales force licensed to sell final expense insurance in 2011, which should contribute to the company’s future growth.

Structured as an MLP, StoneMor Partners largely avoids corporate level taxes and passes on a greater portion of its cash flow to investors. Unitholders also see tax benefits because a substantial portion of MLP distributions are typically classified as return of capital. This allows you to avoid taxes until you sell the units.

With a proven track record of consistent revenue and distribution growth as well as expansion opportunities ahead, StoneMor Partners LP is an attractive holding for long-term investors.–Benjamin Shepherd

WHY TO BUY
STONEMOR PARTNERS LP (NSDQ: STON, $25.17)

*Favorable demographics spell profit opportunity
*Market misunderstanding equates to high yield
*MLP structure offers attractive tax benefits