Master Limited Partnerships (MLPs) are in vogue right now. Despite the recent selloff in dividend-paying stocks, there's a lot of interest redeveloping as investors realize that, even with the probability of higher tax rates on dividends, the returns still outpace CDs, Treasuries and bonds.
And based on the latest report from the Federal Reserve, that's not going to change for at least two more years, maybe even three. Mainly because the Fed isn't planning to raise rates until unemployment falls to 6.5% or lower. That's not going to happen anytime soon, especially if the economy slows in 2013 as a result of domestic fiscal policy or global economic malaise.
So dividends are back, and they're likely to be hotter than ever. That's especially true of MLPs, which have extraordinary yields - some as high as 15%. Here's one example that I especially like.
Linn Energy LLC (LINE) is an independent oil and natural gas company that has operations throughout the United States. It went public in 2006 and has increased its distributions by 80% since that offering.
The company sits on more than 5.1 trillion mcf of natural gas reserves, as well as substantial oil reserves. The bulk of its income comes from drilling and selling natural gas and oil.
But what I really like about LINN is that it's a serial hedger. It's hedged 100% of its oil production through 2016 and 100% of its natural gas production through 2017.
Now, if the objective of the company were to maximize profits in a rising energy market, this would be a mistake. However, LINN has recognized, and correctly so, that energy prices are likely to trade in a narrow range for some time.
And by hedging production at higher prices, LINN can predict its cash flows and profits, and deliver distributions to investors that are stable, predictable and growing.
It gets better…
As we've talked about, MLPs have a complex tax structure that requires extra work on your part. Basically, in place of the 1099 tax report you'd get on shares of a corporation, MLPs require a much longer K-1 form.
But Linn has come up with a solution to that problem: A tracking stock - Linn Co. (LNCO) - that receives dividends from the parent MLP as income, takes care of the paperwork related to taxes, and then distributes the balance to investors in the form of dividends.
What's great is, these dividends are still treated as ordinary income. But they are subject to tax reporting through a 1099, which makes it infinitely easier for investors at tax time. It also means greater efficiency in IRAs, which are the absolute best vehicle to use when you want to defer taxes in general. Especially when you consider the higher rates on income looming on the horizon.
What's more, you still get to enjoy the juicy yield. Linn Co. currently yields 7.68%, compared to 7.84% for Linn Energy LLC. Put simply: LNCO offers all the benefits of owning an MLP - the higher yield, exposure to natural resources, a growing distribution stream and solid management team - without the headaches that come with being a limited partner.
So if you're looking for a high-yield option that blows the pants off of CDs, Treasuries and 97% of standard equities, then LNCO could be an option for you. Just make sure to consult your tax advisor, no matter what you choose.