Investing in High Yield U.S. Income Partnerships

United States Income partnerships, generally known as Master Limited Partnerships or MLP's, are investment vehicles that are similar to income royalty trusts, except that they are structured as limited partnerships. MLP's have several advantages over regular high income stocks. They avoid double taxation because they pass through income without being taxed at the corporate level. In addition, they can pass through tax deductions. However, there are a couple issues you should be aware of, that make them different from income trusts.

First, they don't send out 1099 forms, they send out a Schedule K-1 Form, and the income is reported on your tax return much different from regular dividends. In addition, you should never, ever put an MLP into a retirement plan because of the UBTI or Unrelated Business Taxable Income problem, which could put the tax-deferred status of your retirement plan in jeopardy, based on my understanding. MLP closed-end funds should not be a problem. However, I am not an accountant. Please discuss MLP's with your accountant or CPA for clarification, before making an investment.

The MLP's are generally involved in pipeline businesses, usually oil and gas. Most of these MLP's have very high dividends.

Terra Nitrogen Company, L.P. (TNH) pays a yield of over 13%. This Sioux City, Iowa-based company produces and distributes nitrogen fertilizer products, such as anhydrous ammonia and urea ammonium nitrate solutions. The company, which trades on the New York Stock Exchange, has a P/E of 12.

Another high yield partnership is Energy Transfer Partners L.P. (ETP) which has a payout of 9.6%. The company is in the business of transporting and storing natural gas through its pipeline systems. The stock, which trades on the NYSE, has a P/E of 12.

Ferrellgas Partners LP (FGP), the propane distribution company, has a yield of 9.1%. This Overland Park, Kansas company distributes gas in all 50 states. The stock has a P/E of 33, and a PEG of 4.4.

Atlas Pipeline Partners LP (APL), is another natural gas distributor with about 7,900 miles of intrastate gas gathering pipelines. The Pennsylvania-based company has a forward P/E of 13.7, and a PEG of 4.31.

For a list of 20 of the top American-based Master Limited Partnerships, which can be sorted, changed, added to and downloaded, go to WallStreetNewsNetwork.com.

Disclosure: The author does not own any of the above.

Comments

[THofler:]

I own some ETP & my understanding is that that the div. yield is about 7%. I've seen a lot of financial news folks get this wrong recently because the most recent quarterly dividend is actually a one-time 4 month dividend.

2008 Mar 10 01:20 PM

[d_teller:]

MLP's in a tax-sheltered account have additional drawbacks besides the UBTI (which also can come from Commodity ETF's and Currency ETF's, because the companies that create the shares, pass through the holder's info to the indexing service): The "return of capital" and "capital loss" amounts which affect the taxable basis in a regular account (reported on the K-1) have no effect on the taxation rate when distributions are taken from any IRA.

The losses cannot be claimed, and the "return of capital", which would increase the basis of shares, and would decrease the tax liability upon their sale, have no effect on the dividends received by the shares in the IRA.

2008 Mar 11 01:24 PM

[whisperonth...:]

What about in a Roth IRA?

2008 Mar 11 07:24 PM

[Tamino:]

The IRA issue had me worried too. Looks like the first $1100 in income is untaxed, therefore not reported, therefor not an issue.

fairmark.com/forum/rea...

(if you're getting more than that, looks like you need an accountant)

2008 Mar 13 11:05 AM

[johnthebear:]

So what is going on with Terra Nitrogen, TNH? The price is dropping like a rock through resistance levels at 118 and now 109! The stock pays a huge dividend and a 70% dividend payout. Earnings are great and I cannot find any reason why this stock should be trading so low. Looks like now it could fall to 90/share down from 137 when I began watching the stock a short time ago. I would appreciate your help.

2008 Mar 20 11:01 AM

[10 bagger:]

Paulson has repeatedly said that "they will do whatever it takes" to keep the party going. Trashing the commodities is the favored technique, since that is wher investors traditionally seek shelter when thing get truly weird. Energy and precious metals are currently being hit hard.

Of course you have to be aware of how the markets have been orchestrated over the past 18 years with Greenspin at the helm to see the huge imbalances that these shenanigans have created. His successor just can't sell the program as well as "Easy Al" did.

"When a well-packaged web of lies has been sold gradually to the masses over generations, the truth will seem utterly preposterous and its speaker a raving lunatic." ~~ Dresden James

2008 Mar 20 12:32 PM

[sdcougar:]

Re: TNH 'dropping like a rock', I, too, would like input. I have just a few shares.
Here is my very limited take on it: Seems the down trend in Terra has followed some downside and uneasiness in grains. I am a farmer about 60 miles from Terra. They can sell all the N they can make. Whether corn goes up OR down, corn is sky-high from the farming end and farmers need N.
Just in my area the limited number of pivot irrigation systems have at least tripled this winter. The more bushels of corn you can raise per acre the more N (nitrogen, what Terra makes) you need, regardless of the price of corn., So, terra stock may follow the other commodities, but they cannot make too much N or sell any less from what I can see.

2008 Mar 27 03:25 PM

[bonnardflamer:]

yo sdcougar. when is the demand for N. spring? am not an ag major. but did go to a corn college u of illilnois--great ag department.

2008 Mar 27 11:17 PM

[sdcougar:]

Yes, the demand for N is in the spring.

2008 Mar 31 11:47 PM

[gyurinull:]

N is a major ingredient of fertilizers; those are up-up-up many fold! How much before the rug is pulled? How about safety for a change in tjhios crazy time?

2008 Jul 12 10:26 PM