Energy MLPs Offer Low Risk For High Yields

Persons seeking smart investments to maximize their returns for low risk may do well to head over here and learn more about putting their money into Master Limited Partnerships. These groups, found mostly in the energy sector, are coalitions of partnering corporations which form a publicly traded limited partnership. What this means in terms of both the legal and financial landscapes is that an MLP functions much like a publicly traded company offering securities on the open market and a limited partnership in terms of tax law. An MLP therefore enjoys the liquidity advantages of the former and the tax benefits of the latter. Investors buy units, rather than shares. This is an important distinction because unitholders receive quarterly dividend payments but pay only a personal income tax on that income and are not liable for corporate income tax on those same investments.

MLP investments are traded as index funds offering steady, rising income for the unitholders. The Alerian MLP Index has been outperforming S&P 500 funds over the past decade now, averaging annual returns of 21.3%. That is over three times the rate S&P 500 funds have managed to yield through the same period. Combined with the long-term tax advantages, the MLP becomes a more attractive opportunity for investors to consider.

MLPs are engaged in connecting companies involved with oil and gas extraction, refining, transport, and those enterprises supplying these operations. MLP index funds are not commodity based but activity based. Like the general store owner who sells tools, clothing and supplies to the gold miners, the energy MLPs make their profit supplying the activities of the energy producers while not actually owning the commodities themselves. Commodity prices may get volatile, but getting to and moving those commodities will always be a steady business. That’s where the MLP collects its cut on the business. And that’s where the investments of the unitholders really pay off.

Long-term, MLP investment enjoys the additional advantage on tax-deferment until the unitholder sells off his stake. Years down the line, when the investor decides to cash in, after having also received steady dividends over the years, the sale is assessed only for capital gains taxes which are much lower than the personal income tax rate. This translates into a tax avoidance of 80% or better, making an MLP index fund one of the best deals all around.