Master Limited Partnership Investments, called MLP investments for short, are a type of limited partnership that are designed to combine the tax benefits found in limited partnerships with the ease of trading found in publicly traded securities. Typically, MLP investments are part of the real estate, natural resource, or financial service industries.
Master Limited Partnerships are similar to corporations but differ in that they are not considered to be a single entity. Instead, an MLP is made up of all of the separate entities involved in the partnership. Each entity is responsible for paying taxes individually instead of an overall corporate tax applied to the MLP as a whole. This is a big advantage over a corporation, in which corporate taxes are applied, and then taxes are again applied to the shareholders. This tax benefit is the chief advantage of MLP investments versus corporations.
To invest in an MLP, usually one would speak to a broker, similar to buying stock in a corporation. The broker sells MLP units, which are generally speaking worth more than a similar share of an equivalent corporation. MLP units typically will then pay out on a quarterly basis.
To be considered an MLP, the partnership in question is required to generate a minimum of 90 percent of its income from qualifying sources such as mining, oil extraction, and refinement, or natural gas extraction and refinement. This is because the required quarterly payouts make the stable nature of these industries some of the best ways to keep up with payments.
Should you invest in MLPs?
Here are some pros and cons:
There are a few key benefits to MLP investment. First and foremost, MLPs tend to be high yield. You can expect a 6-7% yield for your average MLP. MLPs also offer very predictable payouts. Because of the industries involved, stable commodities like oil and gas, your payouts will be easy to predict. The fact that MLPs pay no taxes are the company level also means that an MLP will pay out more than a similar corporation.
However, there are drawbacks to consider before investing in an MLP. Chief among this disadvantages is the fact that MLP unitholders are responsible for filing their share of income tax for the partnership. This can be complicated, especially if the partnership operates over multiple states with separate tax rules and jurisdictions. These taxes can come due even if the funds are going into a retirement account or otherwise are not immediately accessible. MLPs also have fewer sources of investors, since many institutional investors like pension funds avoid incurring taxes on their earned income.
As you can see, MLP investment is an industry worth looking into. The greater gains made possible by the lack of double taxation means that an MLP will often outperform traditional stocks. If you are interested in investing, speak to a broker today and ask what your options are in MLP investment.