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investing in master limited partnerships

Article Index

The Benefits of Investing in Master Limited Partnerships

By , Contributing Writer, Money Morning -

Income-oriented investors looking for an alternative to dividend stocks and bonds have a great solution: investing in master limited partnerships. You see, MLPs combine the tax benefits of a traditional limited partnership with the liquidity of a publicly traded company. MLPs have a partnership structure, but they issue units that trade on an exchange like […]

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Investing in Master Limited Partnerships 2013: Three Stocks with Yields Over 8%

By , Associate Editor, Money Morning • @DavidGZeiler -

Anyone who wants high-yield stocks in their portfolio should be investing in Master Limited Partnerships (MLPs).

MLPs are special kind of dividend stocks. Technically, MLPs are tax-advantaged limited partnerships whose units are traded on exchanges just like common shares of stock.

But what sets MLPs apart from most stocks is that MLPs pay very high yields - typically 5% to 12%. This is because U.S. law mandates that they pass most of their income on to unit holders.

And yet, because MLPs are limited partnerships, ordinary shareholders do not suffer unlimited liability as they would in a regular partnership and so can treat their investment as if it was in an ordinary company.

That's why investing in MLPs is such a smart strategy for the dividend-hungry investor.

However, the unusual nature of MLPs -- their income is not taxed at the partnership level - means the government only allows businesses deemed essential to the U.S. economy and national security to adopt the model.

In practice, that typically means companies engaged in the extraction, storage, and transportation of energy commodities like oil, natural gas, and coal, although MLPs do crop up in other industries, such as shipping.

While knowing how to invest in MLPs is great to boost your income, as stocks they usually don't have a lot of upside unless the underlying commodity experiences a price spike.

Nevertheless, the exceptionally high dividends make investing in MLPs worthwhile for at least a portion of a portfolio.

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Investing in Master Limited Partnerships: Earn Higher Returns and Beat the IRS

By , Contributing Writer, Money Morning -

Contrary to popular belief, you can earn higher returns and pay lower taxes.

All you need to do is make one simple move. It's achieved by investing in master limited partnerships, or MLPs for short.

Due to an obscure law passed during the Reagan era, companies that service the oil and energy sector are allowed to funnel profits directly to their investors.

And because of a unique tax loophole, investors who hold MLPs for the long term can completely avoid paying taxes on 80%-90% of all of their earnings.

For MLP investors, those returns can be substantial.

First, there are the hefty "distributions" MLPs pay out year after year. In fact, several of the 50 companies in the benchmark Alerian MLP Index offer yields of 7.5% or higher.

Second, there is price appreciation which accounted for about 32% of the gain the index has generated since the end of 2007, according to Investing Daily.

Altogether, that gave the Alerian MLP Index a total return of 66.6%. Meanwhile, the S&P 500 Index lost 1.55% over the same period.

What is a Master Limited Partnership?

Most MLPs are involved in the business of connecting energy producing fields with refineries, distribution, and retail sales centers.

But, despite popular belief, most have limited exposure to commodity prices.

That's because most MLPs own midstream energy assets such as feeder pipelines and storage and transport facilities.

It's a great business model because MLPs don't actually take ownership of the commodities. They transport, store and process them.

Doing so, they simply act as gate-keepers, extracting a heavy toll every time a transaction takes place. So when oil or gas is moved from Point A to Point B, MLP pipeline owners get paid.

Or when oil moves through the system and has to be stored, MLPs get paid. In fact, almost anytime anything happens in the energy sector, MLPs get paid.

It all adds up to healthy profits that, by law, are passed on to investors.

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