Master Limited Partnerships (MLPs) combine the tax benefits of a limited partnership with the liquidity of common stock – but at a price. Words: 740

In further edited excerpts from the original article* David I. Templeton (http://disciplinedinvesting.blogspot.com/) goes on to say:

MLPs are a product of the U.S. Tax Reform Act of 1986 and the U.S. Revenue Act of 1987 which define which companies are eligible to structure their operations as MLPs. To qualify, a firm must earn 90% of its income through activities or interest and dividend payments relating to natural resources, such as petroleum and natural gas extraction and transportation. Certain real estate operations may also qualify as MLPs. Like other limited partnerships, MLPs pay no income tax, instead the liability is passed to the unit holders, MLPs’ name for shareholders.

Distributions are Tax Free
Instead of dividends, MLPs pay quarterly required distributions (QRD), based on the stated amount in the contract between the unit holders and the general partner. These distributions are not taxed when they are received. They are treated as a return of capital, thus reducing the cost basis of the investment. MLPs are extremely tax efficient.

Tax Efficiency at a Price
Tax efficiency comes with a price. Once a year, each investor receives a K-1 statement providing details of the unit holder’s share of the partnership’s net income. K-1s can be quite large (I’ve had some up 30-40 pages) and complex for those without a tax background. Unit holders will record items such as their pro-rata share of the MLP’s depreciation, state taxes, etc. on their individual tax form. In addition to the tax burden, MLPs require more bookkeeping to track their basis. Each year the share basis is adjusted down by the amount of cash distributions and also adjusted by the unit holders allocation of net income.

Below are some MLPs that have a history of increasing their unit distributions each year:
1. Enterprise Products Partners LP (EPD) – Yield: 6.60%
EPD is an integrated provider of natural gas and natural gas liquids services, including processing, fractionation, storage, transportation and terminalling. Years of distribution growth: 11

2. TC PipeLines LP (TCLP) – Yield: 7.80%
TCLP has interests in three interstate natural gas pipelines, including a 46.5% stake in Great Lakes Gas Transmission LP. Years of distribution growth: 11

4. Suburban Propane Partners LP (SPH) – Yield: 7.10%
SPH markets propane gas and other refined fuels to residential, commercial, industrial, and agricultural customers. Years of distribution growth: 11

5. Buckeye Partners LP (BPL) – Yield: 6.40%
BPL is one of the largest independent U.S. pipeline common carriers of refined petroleum products, with over 5,400 miles of pipeline. Years of distribution growth: 15

One way to avoid some of the tax headaches is to own MLPs via funds. The funds deal with the K-1s and issue 1099s to shareholders of the fund. This too comes with a price. Note the management expense ratios (MERs) of the MLP funds below:

6. Fiduciary-Claymore MLP Opportunity (FMO) – Yield 7.01%
Fiduciary/Claymore MLP Opportunity Fund is a closed ended equity mutual fund launched by Claymore Securities, Inc. It is co-managed by Claymore Advisors, LLC and Fiduciary Asset Management, LLC. Total Assets: $444.3 million; MER: 2.92%

7. Tortoise Energy Capital Corporation (TYY) – Yield: 6.43%
Tortoise Energy Capital Corp. is a close-ended equity mutual fund launched and managed by Tortoise Capital Advisors L.L.C. It invests in the public equity markets of the United States. Total Assets: $22.6 million; MER: 3.92%

8. Tortoise North American Energy Corporation (TYN) – Yield: 6.30%
Tortoise North American Energy Corporation is a close-ended equity mutual fund launched and advised by Tortoise Capital Advisors, L.L.C. The fund primarily invests in the public equity markets of North America. Total Assets: $148.9 billion; MER: 3.21%

MLPs provide excellent yields and are a tax efficient way to invest, but you must prepared to deal with their quirky characteristics.

*http://dividendsvalue.com/6067/increasing-dividend-yield-part-v-mlps/ (Disciplined Approach to Investing is primarily a blog focusing on the dividend growth investing discipline to provide investors with insight into a disciplined investing approach that should create wealth over time.)

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By cutting the federal funds rate to a range of zero percent to 0.25 percent, the Fed has forced rates on short-term Treasuries, short-term certificates of deposit, and money market accounts into the gutter. You can’t earn squat on these safe, cash-like investments so where can you turn for the income you need? Words: 540

In further edited excerpts from the original article* Mike Larson (www.moneyandmarkets.com) goes on to identify three alternatives that are worth considering:

Income Alternative #1: The Energy Sector’s Master Limited Partnerships (MLPs)
We’ve seen a sharp rally in the price of all kinds of energy products yet consumers and businesses never completely STOP using energy, regardless of the cost. That means the industry still needs to store and transport gas, oil, and other petroleum-based products around the country each and every day and that’s where energy Master Limited Partnerships, or MLPs, come in. These companies own many of the storage and distribution networks that energy companies use to get their products to market.

They get paid whether energy prices rise or fall and because of how they’re organized (in the corporate sense), they spin off handsome dividends. It’s not unusual to see yields of 5 percent, 6 percent, 7 percent, or more in the sector.
Don’t get me wrong: MLPs still trade like stocks. So there’s definitely price risk involved but I believe they’re a solid alternative for yield-starved investors.

Income Alternative #2: Utilities
Another sector that offers juicy yields is utilities which include natural gas providers, electric companies, and even telecommunications firms. These businesses clearly aren’t recession proof so when the economy tanks, so does demand for power and telecommunications services but the swings are typically much less severe than what you see in housing, technology, or manufacturing. Even during the worst downturns, those core businesses still tend to spin off healthy amounts of cash.

Again, you don’t have to look very hard to find handsome dividend yields in the sector. Many leading utilities yield at least 5 percent or 6 percent and that’s better than you can get anywhere on the Treasury curve.

That’s not all, either. I’m seeing a heck of a lot of healthy stock charts in the sector, with breakouts all over the place. Buy the right stock at the right time and you can earn a juicy yield AND rack up some capital gains.

Income Alternative #3: Foreign Fixed Income Securities
You don’t have to keep all your fixed income money in the U.S. if you don’t want to and, in fact, you probably shouldn’t because foreign yields are much more attractive than those offered here in the U.S. Bottom line: you can earn higher yields AND [sometimes] get a currency “kicker” by investing in foreign, fixed income securities. Foreign dividend-paying stocks are another alternative. Many yield much more than their U.S. counterparts.

* http://jutiagroup.com/2009/12/04/where-to-look-in-a-world-starved-for-yield/ (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.