*This blog post is my personal opinion only and may contain affiliate/referral links.
MLP or Master Limited Partnership stocks are still relatively unknown to some investors but offer a different and unique holdings on their portfolio. Don’t be dissuade with the “Limited Partnership” jargon; what you should know is that MLP “combines the tax benefits of a limited partnership (LP) with the liquidity of a common stock”(Investopedia).
There tends to be some complication on navigating the taxation for MLP so consult a professional if you need to. At any case, investors are sent a K-1 tax form so they can detail their income every year. In general, most of the MLP distributions are typically tax-deferred, with the remainder taxed as ordinary income in the current year. These payments represents the distributable cash flow that the company pass through to the investors.
Diversifying a portfolio is always a good move because it spreads the risk and reward of the holdings. When one sector is not doing well, a good performing sector would pull up and balance the entire holdings. A fine example is how the tech sector become the clear winner during the peak of the pandemic because of its remote capacities while others struggled and were left behind like the airline industry.
Typical of an MLP stock is its higher than usual yield. EPD (Enterprise Products Partners) 7.33%, MMP (Magellan Midstream Partners) 8.11%, and ENB (Enbridge) 6.46%, just to name a few, are some of the MLPs with above 5% yield. If you put this high yields next to the average savings interest rate of 0.04% APY in the US, then it is really worth a second look, even if the taxes are factored in.
Energy and Oil Sectors are Rebounding
Another thing that you should know about MLPs are they are mostly on the Energy and Oil sectors like pipeline and storage, and a small percentage of real estate. If there’s any indication why it’s a good time to invest on MLPs right now, it is because energy and oil stocks are one of the hardest hit sectors during the pandemic and as the economy reopens and normalizes, we can see a surge of 31.76% YTD return of this sector.
In summation, MLPs are good alternative stocks to invest for diversification and high yields. Majority of MLPs are in the Energy and Oil sectors, and could be volatile at times. There are some tax implications of owning a share/unit that must be considered too. Please research how taxation differs for individual and retirement account, US and foreign national, and others.
Thanks for reading.