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Dividend investing update: With U.S. stocks at all-time highs and the current bull market still going strong after five years, many analysts warn that asset valuations are out of touch with reality and a correction is headed our way. In the event of a market correction, investors will be limited to settling for returns lower than the historical average or seeking out investments that add an extra percentage or two in dividends.
That's why alternatives to conventional dividend-investing strategies are worth a look. They offer high yield and don't always suffer share-price losses during market corrections that some dividend stocks see.
One such alternative is master limited partnerships (MLP), which are limited partnerships that are publicly traded on securities exchanges.
|Gas processing plant: An MLP's revenues must come from commodities, natural resources, or real estate.|
Money Morning's Global Energy Strategist Dr. Kent Moors considers MLPs one of the best ways to invest in the energy sector. "From their tax advantages to their high-paying yields, it's hard to beat the returns of a master limited partnership," said Moors.
MLPs are an attractive investment because they coalesce the tax advantages of a limited partnership and the liquidity of publicly traded securities.
General partnerships are remunerated on a sliding scale and garner a larger share of every dollar of cash flow as the limited partners' revenue distributions grow. This prompts the general partner to grow limited partner distributions as part of incentivization.
In order for a partnership to be qualified as an MLP, a majority of its revenue must originate from the processing, production, or transportation of commodities, natural resources, or real estate. This is due to stringent U.S. federal laws applied by the Internal Revenue Service.
As of late last year, only 111 MLPs were listed on U.S. stock exchanges. In spite of the relatively small number of MLPs to choose from, this unique investment vehicle offers a number of benefits.
Let's take a look...