By and large, master limited partnerships are just that – limited partnerships that happen to be highly liquid, and tradable on U.S. stock exchanges, just like traditional stocks.
Instead of shares, MLP’s offer investors “units,” and payouts aren’t called dividends, they’re called “distributions.” In essence, MLPs offer the tax advantages of limited partnerships with the asset growth benefit associated with common stocks.
Tax-wise, MLPs are treated differently from stocks and bonds, and are generally treated more favorably by the Internal Revenue Service. Taxes are paid by MLP unit-holders, on a pass-through basis.
That means MLPs, unlike common stocks, don’t face double taxation on distribution payouts to investors. However, non Americans (like Canadians, eh) do face double taxation—there is a withholding tax by Uncle Sam and they are not part of the Canada US tax treaty. All MLP investors should check with their tax accountants.
Master Limited Partnerships are often referred to as an “investor’s dream.” Why? Because some MLPs really do make that true – at least from a historical sense. Statistically, MLPs offer…
There’s no sure thing on Wall Street, but MLPs may be as close as a “sure thing” as possible. Since MLPs generally invest in relatively stable midstream energy companies – think pipelines, storage tanks, and oil and gas terminals – investors benefit from high demand for the services those midstream oil and gas companies provide. In other words, it doesn’t matter where the price of oil stands – $150 or $75 – as long as global consumers use oil and gas, MLPs benefit from that steady demand.
Master limited partnerships have proven resilient against down stock market cycles. In the immediate aftermath of the economic collapse of 2008, 39 of 50 MLPs actually raised their distributions to investors to, on average, 10%. In addition, as MLP’s invest in “high demand” midstream oil and gas companies, MLP’s provide investors with stable, reliable.
While MLP’s do offer stable, dependable yield growth, significant tax advantages, the tax situation is complicated, and you may need to bring in a tax advisor to handle the MLP portion of your investment/tax portfolio. In addition, exposure to small-cap oil and gas stocks – a common investment for MLPs – can lead to higher-than-normal volatility.
Some master limited partnerships are riskier than others. For example, larger pipeline MLPs are relatively stable – they generate a steady cash flow, as they’re not significantly impacted by oil and gas prices. Larger pipelines are also difficult to replace, making them more valuable for MLP investors.
That’s not the case for smaller pipelines that move natural gas from processing plants to suppliers. Since natural gas is more vulnerable to commodity price fluctuations, MLP investors should proceed with caution when it comes to evaluating various MLP investments.
According to the Interstate Natural Gas Association of America both the U.Ss and Canada will shell out an estimated $84 billion to build new midstream oil and gas platforms, pipelines, storage tanks, and other necessary infrastructure that meets the needs of skyrocketing domestic energy production.
That demand will generate big revenues to MLPs, who are expected to provide that entire infrastructure. In turn, those revenues should fatten up distributions, and boost MLP performance for years – and maybe even decades to come.
MLPs are exactly the product of the Wild, Wild West. In fact, the U.S. Security and Exchange Commission regulates MLPs, just like it regulates stocks. As a result, MLPs must file annual and quarterly reports, and keep investors apprised of any changes to its business model, and any developments that may impact the MLP. In addition, MLPs must also comply with the accounting requirements mandated by Sarbanes-Oxley.
What are the top reasons why regular, everyday investors are so attracted to MLP’s? Here are four big reasons why:
– Brian O’Connell, guest editor
Publisher’s Note: My top yield play for 2013 stems from a very simple premise: a sector that I strongly believe is best positioned to benefit from North America’s surging energy production. Click here to find out how I’m playing it for profit, and how you can as well.