MLP Magic

Energy Strategist (09/23/2010)
"The master limited partnerships (MLP) in the model portfolios are among this publication's most successful and longest-standing recommendations. Given their long tenure, it's no surprise I've written about this asset class extensively over the years.

Most MLPs are involved in the midstream energy business, which includes storing, transporting and processing natural gas and oil—businesses that generate reliable cash flows, much of which flows through to unit holders in the form of quarterly distributions (the MLP equivalent of dividends). Right now, the average MLP yields 6%–6.5%, though some names boast yields that exceed 10%.

And although MLPs trade on popular U.S. exchanges, they aren't corporations and are exempt from U.S. corporate income tax. Instead, MLPs pass through distributions to unit holders, each of whom pays taxes on his or her share of the partnership's profits. But profits aren't all MLPs pass through to investors; unit holders also enjoy considerable tax shields. Non-cash accounting charges, such as depreciation, shield a large portion (often 80%–100%) of the distributions from taxation. In other words, you can defer taxes on most of your accumulated distributions until you decide to sell the MLP.

These tax advantages will not expire if Congress allows the tax cuts implemented by George W. Bush to sunset."

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