Master Limited Partnerships – tax-advantaged high current income and growth potential from energy infrastructure companies
Master Limited Partnerships (MLPs) are liquid, exchange-traded securities of companies engaged in the operation of energy infrastructure and transportation facilities, such as oil and gas pipelines, coal mines, and propane distribution. We invest mostly in MLPs that own and operate infrastructure assets generating stable, volume-driven cash flow. Typically an MLP earns a fee per unit of volume of energy commodity delivered, rather than sharing in the price paid for the commodity. Consequently, changes in energy prices may have a more limited impact on portfolio performance than if the MLP invested directly in the commodity.
For tax purposes, MLPs are considered "pass-through" entities by the IRS, thereby eliminating the double taxation structure that penalizes traditional corporate dividends. As a result, MLPs are able to distribute more of their earnings and cash flow to the limited partners. Typically, a portion of these distributions is treated as a tax-free return of capital. MLPs may therefore provide attractive tax-advantaged distributions for income-oriented investors. Additionally, they provide opportunities for capital appreciation and inflation protection not available from most fixed-income instruments, given the ability of MLP operating units to increase prices and throughput volume over time.
Gould’s Master Limited Partnerships strategy is concentrated in a relatively small number of securities within an industry that stands to benefit from secular growth in the energy supply. Although performance may be highly correlated with energy prices at times, historically MLPs have exhibited low correlation with other assets.
Please
note that MLPs generate Form K-1s annually (rather than Form 1099s) for tax
reporting purposes. MLPs should not be held in qualified retirement accounts
(e.g., IRAs, profit sharing plans) since the tax-deferred income is considered
passive income and can result in a tax obligation. Please consult with your
tax professional when considering these investments. This strategy should serve
as a complement to a broadly diversified portfolio of more traditional investments,
to provide yield and exposure to the energy infrastructure market segment.
It is not intended to serve as a core holding or to occupy a major share of
an investor’s total portfolio.
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Master Limited Partnerships Overview