What are MLPs or Master Limited Partnerships?
MLP stands for a master limited partnership. An MLP basically is a type of stock that exists as a publicly traded limited partnership. Everyone who invests in shares, or rather “units”, of an MLP is technically considered a “limited partner”. Master Limited Partnerships have two different types of partners. One type of partner is the “limited partner” which are the investors that buy shares or units of the master limited partnership. The other type of partner is called “general partner”, who are the people who manage the master limited partnership like hedge fund managers that manage the investments in other investment companies like Vanguard, Charles Schwab, Fidelity, and others.
How are MLPs taxed?
Quarterly distributions from the master limited partnership are similar in nature to quarterly common stock dividends. But they are treated as a return of capital, as opposed to dividend income. So, the unitholder does not pay income tax on the returns. Most of the earnings are tax-deferred until the unitholder sells their shares/units. Then, the earnings are taxed at the lower capital gains tax rate, rather than at the higher personal income rate, thus offering significant additional tax benefits. In order to achieve this tax status, the master limited partnership must get at least 90% of its income from its investments in real estate or natural resources.
The fact that investors can receive tax-sheltered dividends from MLPs until the shares are sold is one of the biggest draws for people to invest in them. MLPs are considered low-risk, long-term investments, providing a slow but steady income stream, but unfortunately, they are limited to the natural resources and real estate sectors. So how well this type of stock does is dependent on how the market in these two sectors is doing at any given time.
One significant disadvantage to investing in master limited partnerships is that their tax filing requirements are noticeably more complex than the average stock. Each year you need to file an Internal Revenue Service (IRS) Schedule K-1 form that is sent to the investor. Unfortunately, this form tends to be sent to investors much later in the year than all the other tax documentation that you or your tax preparer need to use in order to properly file your taxes.
While K-1 forms create extra work for investors or their tax preparers, the structure of master limited partnerships allows investors to avoid the double-taxation that you typically see in investments in C-Corporations.
What are some examples of MLPs?
Here are some examples of companies whose stocks are master limited partnerships:
- PAGP – We start the list of best MLP and pipeline stocks to buy now with Plains Gp Holdings, LP. The company focuses on providing midstream energy infrastructure in the United States and Canada. Plains handle more than 6 million barrels per day of crude oil and NGL in its transportation segment.
- ENB – nbridge, Inc. was established in 1949. It is an energy infrastructure company that focuses on transportation and the generation of energy. They operate the longest crude oil and liquid hydrocarbons transportation in North America.
- EPD – Enterprise Production generally provides products that are used as feedstocks in petrochemical manufacturing. The company was ranked 105th in the 2018 Fortune 500 list of largest United States corporations by revenue.
- ENBL – Enable Midstream is a publicly traded master limited partnership formed in May 2013 that owns, operates and develops strategically located natural gas and crude oil infrastructure assets.
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Disclaimer: I am not any sort of investment or financial professional giving any sort of legal advice. I’m just some guy trying to teach other people about how they might navigate the financial world.