Classifying MLPs as "income" stocks is a big mistake. It's a costly one too…especially if it's growth you're after.
Yes, the partnerships toss off tons of cash. The high-net worth folks I work with can achieve, for example, $350,000 in cash payouts from investing $5 million in an MLP yielding 7%.
But they're more like growth stocks in disguise…
Remember, the high income is merely a function of the MLP structure. They're set up in a "pass-through" structure. This means they must pass on the vast majority of profits to their investors.
And, up to 90% or more of the distributions you receive from an MLP will be considered a return of capital, not income, by the IRS. You don't pay taxes immediately on this portion of the distribution.
But these big cash payouts are driven by growth. A lot of it.
A $2,500 stake in energy MLPs 10 years ago is worth $10,000 today – twice the return of the S&P 500. And that's just the sector as a whole.
You can do much better, of course, by investing in the group's best players, like the one we'll look at today. The growth potential – realized, of course, by the increasing size of its payouts – is superb.
Just 24 months from now, you could be making 13.4% on every dollar you invest at today's prices.
First, here's what makes the entire asset class so powerful…
Here's Why I Like MLPs
MLPs are limited partnerships that are easy to own, with most of them trading on the New York Stock Exchange. And as I just showed you, MLPs have attractive yields — easily surpassing 5% and even reaching double-digits.
What's more, MLPs combine the tax benefits of limited partnerships along with the liquidity of stocks. You can enjoy tax savings not available to ordinary dividend stocks.
Most MLPs are in energy-related industries. The energy MLPs I like are in the exploration and pipeline industries not affected greatly by the price swings of the underlying energy commodity, such as oil and natural gas. Price swings are kept in check because energy transportation and pipeline rates are often set by regulatory agencies.