Master Limited Partnerships (MLPs) are stocks given tax preferences under the 1987 Tax Act. Basically, they are tax advantaged utilities benefiting from the shale energy boom in the United States.
MLP’s income is very attractive and most midstream MLPs offer solid dividend growth which grows their income. Because MLPs are tax advantaged, most of their income is treated as a return of capital and it carries no initial tax liability.* As a result, MLPs offer some of the most attractive after-tax equivalent yields and will likely experience distribution growth. Since most MLPs are involved in the build out of the energy infrastructure driving the United States Energy Shale Boom, the growth prospects for many MLPs is quite robust. Further, most MLPs are natural monopolies regulated by the Federal Energy Regulatory Commission. This means that many of these MLPs have government protected businesses that are free from unbridled competition. E.g. FERC won’t let a second pipeline be built next to a pipeline unless there is clear demand for a new pipeline.
MLPs own, operate, build and acquire transportation, storage and processing assets of natural resources primarily natural gas and petroleum distillates. Pipelines are typical toll road business models employed by MLPs that collect a tariff for the transportation of petroleum distillates. Other assets are leased out through long term contracts, and often have PPI (Producer Price Index) escalators build into their contracts adding a second hedge against inflation.
We believe MLPs are outstanding retirement income vehicles due to their attractive tax advantaged distributions and stable business models.
MLPs have had a tremendous return history. Their highly competitive yields combined with high distribution growth have driven demand in a favorable interest rate environment. Additionally, the advent of horizontal drilling and hydraulic fracturing have unleashed enormous natural gas, liquids and petroleum reserves that have propelled the huge energy infrastructure underpinning the energy shale boom which has elevated the United States into the position of a leading oil and gas producer on the world stage. These factors have driven exceptional performance as reflected in the chart below.
View our presentation on Master Limited Partnerships. Please read the disclaimers at the end of the presentation. Past performance is no guarantee of future results. Afterwards, please contact us for a personal consultation.