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Steven Ircha Jr. is a student at the Bronxville School in Bronxville NY.
  • Steady Cash Flow Investing In Master Limited Partnerships  0 comments
    Nov 30, 2012 3:33 PM

    Many investors today are looking for additional cash flow to help them pay their bills. Just when you think you've heard it all, something interesting comes along. Most investors are aware of the existence of limited partnerships and have undoubtedly been presented with several opportunities to participate in one. The signal feature of a limited partnership was always found in the fact that it was a private investment, and thus not subject to the typical regulatory hurdles and tax penalties inherent in public equities. However, they are not very liquid.

    Many investors today are looking for cash flow from their investments but are also demanding liquidity. For this reason, a class of hybrid has emerged that allows investors to enjoy the tax advantages of a limited partnership and also profit from the larger size possible from a public offering. These so-called master limited partnerships are structured in typical form, with a general or operating partner to run the organization and a series of limited partners whose involvement is basically restricted to financial participation. The twist comes in the fact that MLPs are publicly traded just like equities. Investors can thus unload or increase their participation in the partnership with relative ease.

    The size of MLPs permits them to pursue larger goals than that of a typical partnership. In addition, they are restricted to only a few specific fields of operation by Congressional fiat. These are almost exclusively found in the field of energy resource development and transportation.

    A typical MLP is used to finance the construction and continued operation of, say, a natural gas pipeline. Once the pipeline is operational, there is no need for significant additional capital outlays, and the limited partners can expect a continuous flow of non-corporate-taxed income for as long as they choose to remain associated with the enterprise.

    In the example cited above, the profit derives from payments received from third parties who pay to have their product transported through the MLP-owned delivery system. Since the line has a finite capacity and charges a set fee per unit transported, profits are likely to remain relatively unchanged except through the erosion of inflation.

    Due to their steady and easily-anticipated flow of income and the current tax advantages that permit investors to avoid the double taxation of a corporate investment, MLPs offer a nice point of equilibrium between the need to shelter wealth from destruction in the current financial climate and the necessity of generating a reliable and reasonably tax-friendly profit. There are more than a few old dogs who can profit from an MLP's bag of tax-saving tricks.

    I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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