Market Beat: What are MPLs, and why they may be a good thing
March 2, 2012
TRUCKEE, Calif. andamp;#8212; MLP is an abbreviation that stands for master limited partnership. MLPs can be a good income investment because of their high yields and preferential tax treatment. MLPs are also referred to as andamp;#8220;publicly traded partnerships.andamp;#8221;MLPs give the investor an ownership stake in a specific venture; many are energy related like gas pipelines, coal projects or oil fields. Some shipping and transportation companies are also set up as MLPs.MLPs are an attractive alternative to bonds and dividend paying common stocks because the yields tend to be higher. Bond yields are at all time lows and could stay that way for many years. MLPs pay out up to 90 percent of their profits after expenses to their shareholders.MLPs have different tax treatment than common stocks and the reporting is more complicated, so itandamp;#8217;s wise to consult with your tax advisor prior to investing in MLPs. The income is reported on a form K-1. One factor that makes MLPs attractive is that they can shield a portion of each distribution from ordinary income taxes. The amount that is shielded from income tax will vary with each distribution based on several factors. Careful consideration should be used when purchasing MLPs within an IRA account. The part of the distribution deemed as andamp;#8220;ordinary incomeandamp;#8221; can be considered unrelated business taxable income, (UBTI) and is subject to tax even though the MLP is held within an IRA account. Normally the amount subject to UBTI will be very small, but some investors donandamp;#8217;t like to pay any taxes on an IRA account prior to taking distributions.MLPs also have some unit holder liability considerations. In a corporation, shareholders have no liability for actions taken by the corporationandamp;#8217;s board of directors. An MLP is a partnership, and theoretically, partners could share in the liabilities of the partnership. There are limits on a limited partnerandamp;#8217;s liability, however; they are not fully protected the way shareholders of a corporation are. In practice there has never been a case where unit holders of an MLP have been held responsible for the partnershipandamp;#8217;s actions.The ten largest MLPs currently have an average yield of about 5.5 percent. While that is on the low end of the historical yield range for MLPs, it is still attractive compared to other income alternatives like treasury bonds. Itandamp;#8217;s also possible to invest in MLPs through a diversified fund.Iandamp;#8217;ll be hosting two educational seminars on using options for income and portfolio protection in Reno on March 6 and March 8 andamp;#8212; call 775-657-8065 for details or to RSVP.Kenneth Roberts is a Truckee based Registered Investment Advisor. Ken has been in the securities business since 1992, has worked as a branch manager for a major Wall Street firm, and is currently a portfolio manager for Fusion Asset Management. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-657-8065. Past performance-does not guarantee future results.-Consult your financial adviser-before purchasing any security.