Do you invest in master limited partnerships (MLPs)? MLPs are publicly traded limited partnerships. They combine the tax benefits of a limited partnership with the liquidity of a publicly traded security. MLPs pay no entity-level tax. They are pass-through entities. MLP unit holders are allocated a proportionate share of the revenue and expenses of the partnership.
Most of the publicly traded partnerships in the U.S. are in the energy transportation and storage business. These are the companies that own the pipelines and storage terminals that move oil and gas from the oil fields to the refineries and on to end markets.
The pipeline business is highly desirable. The barriers to entry are high; the cash flows are high, stable, and inflation-adjusted; and the operating costs are low. You’ll struggle to find a much better or more conservative business.
The best part about investing in MLPs is the yield. MLPs distribute all of their distributable cash flow to unit holders. Today, the yield on MLPs is 7%–8%. And since the rates that pipeline MLPs charge to transport oil and gas are periodically adjusted for inflation, those are real yields. So you start with a real yield of, say, 7.5%, tack on another 3% for inflation, and you are already looking at a projected return of over 10.5%. Any growth in the business on top of inflation is likely to add to your return.
Since year-end 1999, the Alerian MLP Index has gained 541% through April 30 of this year. That’s almost a 20% compound annual return in a highly attractive and conservative business. Compare that to the 2.7% loss in the S&P 500 or the 35% loss in the high-risk, low-reward NASDAQ over the same time period. A conservative approach focused on income and dividends is a winning strategy.
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