MLPs may be a new concept for many investors, but those who know about them can appreciate what they see. Ten years ago, there were $30 billion worth of MLPs on all publically traded markets, a figure that has since grown to more than $250 billion. In fact, noted hedge fund manager John Thomas said that since the start of the year, MLPs have been “on fire.”1
MLPs are Master Limited Partnerships, publically traded companies that pay no corporate income taxes, but which in turn are required by the IRS to pay out 90% of their income in the form of dividends. Right away, that makes MLPs of potential interest to yield-oriented investors, who in today’s low-interest-rate environment are having difficulty with traditional fixed-income yields.
There are MLPs in many industries; they’re cousins to the REITs that are long familiar in real estate.
The companies in the Energetic MLP motif are part of the energy industry, and are in either the distribution or production business.
There is, as with any investment, some risk that comes with investing in Energy MLPs. They often finance operations by taking on debt, which can impact a company’s bottom line. In addition, MLPs and their shareholders are often subject to complex tax regulations as a result of their multi-state operations.
MLP bulls like John Thomas argue that the ongoing economic boom in China, with its seemingly insatiable appetite for energy, is something of shining light for MLPs, helping to shield them from the volatility they experience with the ups and downs of the crude oil market.
Overall, MLPs could play a useful role in the portfolios of yield-seeking investors who can tolerate a little more risk in exchange for the prospect of a higher return.
Image courtesy of Harvey Barrison.