A Master Limited Partnership (“MLP”) is a type of partnership that is publicly traded on a securities exchange. MLPs combine the tax structure of limited partnerships with the liquidity of publicly traded securities. Most MLPs are publicly traded oil and gas pipeline businesses that earn stable income from the transport of oil, gasoline and natural gas.
Many oil & gas MLPs derive their revenue based on the amount of product transported and are not sensitive to price fluctuations except where they affect demand. Some MLPs involve other natural resources, and certain other industries, but oil and gas are the most common MLPs.
MLPs usually provide their investors, the limited partners, with distributions that are similar to dividends, but taxed differently. It is expected that the distribution growth of MLPs can grow at a rate at or ahead of inflation, based upon energy demand and price growth.
MLPs are a growing asset class. There are a few giants in the business and continued consolidation is likely. Mid-sized MLPs may be preferable because it is far easier for them to grow their businesses or be acquired by a larger market participant. Their smaller stature will also likely make them less liquid and more volatile.
Another reason why the mid-cap MLPs may outperform larger ones is because they are less followed. As MLPs become more accepted by the general market and their ownership becomes more common, their technical success becomes more at the mercy of market trends and momentum. Smaller companies that are less covered by Wall Street may, therefore, often trade at preferable valuations.
Below, I have listed six high yield mid-cap MLPs that I have previously identified: Boardwalk Pipeline Partners LP (BWP), Buckeye Partners LP (BPL), Enbridge Energy Partners LP (EEP), Nustar Energy LP (NS), Plains All American Pipeline LP (PAA) and Regency Energy Partners LP (RGP). I have provided their present yield as well as their 1-month, 6-month and 12-month performance rates.
Plains All American (PAA) actually recently appreciated into a large-cap MLP, but it is barely above the $10 billion benchmark, and it recently crossed it after about six months of being a mid-cap. It is both the largest and lowest yielding MLP listed. This higher yield exemplifies another potential advantage of smaller MLPs.
MLPs are partnerships, so they do not pay corporate income taxes, on either a state or federal basis. The tax liability of the MLP is passed on to its holders. Generally, each investor receives a K-1 statement that details their share of the partnership's net income. That income is then taxed at the investor's individual tax rate. The MLP may also make cash distributions that are not taxed received, but reduce the cost of partnership shares/units and create a tax liability that is deferred until the MLP is sold.
There are also index and portfolio options, such as the ALPS Alerian MLP ETF (AMLP), which provides exposure to a basket of MLPs and is supposed to correspond to and track the Alarian MLP Infrastructure Index. The annual expense ratio is listed as 0.85%, which is slightly above average for an indexing ETF, but within the normal expense range for a MLP product.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.