Tyson Halsey has been investing in MLPs for over 20 years. MLPs offer four unique characteristics: high yields, high distribution growth, tax advantaged distributions, and stable businesses. IGA offers a range of strategies to leverage the unique investment profile of MLPs.
Midstream MLPs are FERC (Federal Energy Regulatory Commission) regulated natural monopolies. Income Growth Advisors, LLC, believes MLPs are outstanding retirement income vehicles due to high tax advantaged yields, high distribution growth, and stable business models. MLPs can provide consistently high returns, but due to their sensitivity to the commodity cycle, MLPs can experience periods of poor performance.
Individual Accounts:
Our typical MLP account employs a buy and hold strategy with high tax advantaged income as the objective. IGA typically will invest in 3-5 MLPs for accounts for smaller accounts e.g., between $100,000 to $250,000. The long term benefit of owning MLPs is in the distribution growth prospects and tax advantaged income streams generated by the MLP portfolio.
MLPs are not companies and generate K-1s instead of 1099 income. To reduce the administration IGA tends to have “concentrated” portfolios with 3-5 holdings.
For larger MLP accounts such as $5,000,000, IGA typically holds 10-20 holdings. Our objective is own those MLPs whose distribution growth will provide the greatest future tax advantaged income stream for our clients.
MLPs can be used strategically, as an anchor to a large portfolio, generating significant income, while the rest of the portfolio is focused on other strategies such as stock investing, covered writing, shorting, or trading….
Tax Implications and Retirement Plan Strategies:
MLPs are tax-advantaged and do not pay corporate taxes. This tax exempt status means the economics of the MLP is flowed through to the unit holder. Unit holders’ K-1s reflect the unit holders share of the operating economics. Historically, most of the distribution is paid out as a return of capital to the MLP limited partner or unit-holder. A return of capital is a nontaxable distribution. Consequently, MLP unit holders may accumulate significant distributions that have little or no immediate tax consequence. This makes the MLP accounting complicated but can provide a significant source of tax advantaged income. Consequently, IGA has owned MLPS for clients for over a decade and often buys and holds MLPs for years.
MLPs are prohibited from being owned by mutual funds or retirement plans. If a mutual fund or retirement plan owns an MLP, that mutual fund or retirement plan could be subject to federal taxation on the UBTI accrued by the MLP. When those taxes are paid, an MLP fund’s performance can see a drop in performance on the order of 30%. Therefore, we advocate owning MLPs directly and not funds.
For retirement plans, we invest in closed end funds (CEFs), ETFs, ETNs, or mutual funds which will pay those federal taxes, and therefore are not subject to the UBTI taxation.
We buy MLP CEFs opportunistically and strategically when they are at a discount to their NAV (Net Asset Value) to enhance performance and provide attractive income without tax complications. During the COVID collapse of 2020, we bought CEFs as they were at a significant discount to NAV and offered very high yields. Not only did we buy MLPs shrewdly in that market panic, we wrote several letters to our clients and prospects highlighting this tremendous investment opportunity. Those letters are also on Seeking Alpha.
While most MLP LP units generate K-1s, some generate 1099s because they file as C-Corps. Many MLP sponsors or general partners (GPs) are publicly traded corporations “C-Corps”. These GPs are not subject to the tax restrictions of K-1 filing MLPs.
Concentrated Stock Position Strategies:
Corporate executives are often faced with the dilemma of having an overly concentrated stock position. Elon Musk, Jeff Bezos, Bill Gates, Reed Hastings have made fortunes owning large positions in their company stock. Mark Cuban famously hedged his fortune following his company’s buyout by Yahoo in 2000. Income Growth Advisors, LLC can provide a range of tax and risk mitigations options for individuals with concentrated stock positions. Halsey’s work on the floor of the New York Futures Exchange provides valuable experience on hedging large position using derivative strategies.
Tyson Halsey, CFA has experience working with executives and their concentrated positions. Halsey worked in Alex Browns renowned Corporate Executive Services Group “CESG”.
Because Interactive Brokers, LLC offers the lowest margin rates, IGA is especially well positioned to provide hedging strategies to individuals with concentrated stock positions. In combination with an MLP portfolio, IGA can offer a tax efficient program to convert a large, concentrated position into a high tax advantaged yield providing strategy. IGA can help executives diversify their holdings, increase their income, defer taxes, and reduce their downside risk from their concentrated positions.