investing in master limited partnerships

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.