Master limited partnerships (MLPs) have long been a core holding for many savvy investors like Charles Mizrahi. This unique investment vehicle offers excellent benefits making it a great addition to almost any portfolio. MLPs are partnerships that trade on public exchanges like stocks. They differ from regular stocks in a few key ways:
- Most MLPs derive their income from natural resources. Common MLP industries include pipelines, storage, processing, exploration, and production.
- MLPs distribute the majority of profits directly to shareholders. It avoids double taxation and provides substantially higher dividend yields than common stocks.
- MLPs involve less volatility and risk compared to other energy sector stocks. Revenue stems from long-term, fee-based contracts rather than exposure to commodity prices.
MLPs offer dividend-like income and growth opportunities that outpace utilities. MLPs offer impressive returns, reduced volatility, diversification, and tax advantages to yield-oriented portfolios.
Attractive income potential
The first reason Mizrahi likes MLPs is their income generation. MLPs are required to pay out most of their cash to unitholders. The unique structure means MLPs typically offer yields between 5-10%, far higher than the average dividend stock. Income comes from the transportation, storage, and processing fees MLPs collect rather than the underlying commodity price. Even better, MLP payouts often increase over time as infrastructure expands. Charles Mizrahi notes that MLPs have consistently grown distributions well above inflation. This inflation-protected income that rises over time is a core reason Mizrahi believes MLPs deserve consideration.
Lower volatility
In addition to generous income, MLPs also come with less volatility compared to other energy sector stocks. This is because the bulk of revenue comes from long-term contracts rather than exposure to commodity prices. Demand for infrastructure and pipelines tends to be stable, providing dependability that Mizrahi views as favorable for limiting risk. MLPs also have less correlation to the broader stock market due to their structure and income focus. This diversification benefit further dampens volatility in a portfolio. StocksReviewed look at MLP Checks as an ideal way to generate steady payouts with reduced fluctuations relative to stocks.
Tax advantages
As pass-through entities, MLPs avoid double taxation of both the entity and investors. Unit holders receive a K-1 form yearly that allocates taxable income, losses, deductions, and credits. The majority of distributions are considered a return of capital, meaning it lowers the cost basis and faces taxation upon the sale of the units. It differs from stock dividends which face immediate taxation. For Charles Mizrahi, the tax-deferred nature of MLP distributions provides substantial advantages in compounding returns over the long run. It enhances the after-tax net yield investors receive.
Diversification and growth
Investment in energy infrastructure MLPs diversifies portfolios and provides exposure to the sector. Oil and gas infrastructure will be built out by MLPs as the North American shale boom continues. A growing energy production and logistics industry can benefit from MLPs. Distribution growth is fuelled by expansion projects and pipeline construction. Combining essential infrastructure with an investor-friendly structure, MLPs offer diversification with upside potential.