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If 2019 was the year of the real estate investment trust (REIT), 2020 will be the year of the master limited partnership (MLP).
Both REITs and MLPs are great alternatives for investors seeking income.
But there are key differences that distinguish the two. And one big difference will be front and center next year.
REITs typically own real estate or bundles of financial instruments like mortgage securities. Both generate cash flows.
By law, these cash flows are distributed back to shareholders.
The corporate structure of the REIT is similar to other stocks, where the management teams owe a fiduciary responsibility to shareholders.
But in a master limited partnership, investors buy units of the partnership.
There is no “corporate structure” like there is with REITs
Because an MLP owns an underlying commodity, most are in the energy sector.
That reliance, and ownership of a commodity, results in far more volatility for the MLP owner. But it can also lead to a higher reward when prices are moving higher.
REITs are much more leveraged than the typical MLP.
This use of leverage, especially in a low-interest-rate environment like today, helps fuel turbo-charged distributions, some well above 10%.
The advantage goes to the MLP when interest rates are going higher and the underlying commodity price of the MLP appreciates.
And that is exactly the environment we’re likely to see in 2020.
Monetary easing policies are becoming more popular around the world, propelling economic growth.
A leading indicator of inflation, copper prices, has been moving higher over the last month as well.
That bodes quite well for oil prices and owners of MLPs going forward.
These are the top three MLPs to keep on your radar for 2020…