6 Great Reasons to Start DOUBLING Your Yields with MLPs

Sean Brodrick

Lost in the hullabaloo over the recent Fiscal Cliff is that it ended in a deal that handed out a bunch of tax breaks.

And sure enough — one of those tax breaks was for dividend-paying stocks …

And with many dividend-paying stocks and funds trading at bargain prices, this change could provide a nice boost for your bottom line going forward …

The Case for Adding Strong Yields in 2013

Dividend taxes for households making more than $450,000 per year will rise from 15% to 20% (plus an additional 3.8% surcharge for Obamacare, to a total of 23.8%). But they won’t rise all the way to 39.6%, where they were scheduled to head without a Fiscal Cliff deal.

This is good news for dividend-paying stocks and funds—mainly because dividend investors had already priced in Armageddon.

Meanwhile, dividend taxes for those earning less than $450,000 a year will remain at 15%. (That’s 18.8% with the surcharge, for those with income between $250,000 and $450,000.) Even better!

In light of these new developments, you should really take a closer look at companies that pay you — not just dividend-paying stocks, but also master-limited partnerships (MLPs), which are required to pay out most of their cash flow while offering more-favorable tax treatment than dividends.

And because we’re covering some of my favorite ways to profit with energy plays this week, right now I want to share with you six reasons why you should consider using MLPs to turbo-charge the energy portion of your portfolio.

6 Great Reasons to Start

DOUBLING Your Yields with MLPs …

MLPs are a hybrid of the income-producing benefits of bonds with the capital-appreciation advantages of stocks. They combine the tax benefits of a limited partnership with the liquidity found in publicly traded securities.

Here’s what you need to know …

1) MLPs are publicly traded investment partnerships. While they have some of the characteristics of stocks, MLPs have unit-holders, not shareholders. That means you get direct fractional ownership in an asset (often a pipeline). MLPs trade on major exchanges such as the New York Stock Exchange or Nasdaq, and there are also Canadian versions called Royalty Trusts.

2 )The MLP doesn’t pay taxes on its profit. Instead, the money is only taxed when the partnership’s unit-holders receive their cash distributions — unlike dividends, which are often double-taxed.

3) MLPs can have one or more General Partners, who can have a 2% ownership stake in the partnership. Limited Partners — ordinary investors — play no role in the management of the partnership, and are eligible for quarterly cash distributions. Some MLPs even pay MONTHLY distributions.

4) MLPs can invest in anything, but most of the ones I’m interested in are targeted toward the energy sector. MLPs own oil and gas pipelines, transportation and processing, refining, and storage sectors. They allow me (and you) to combine high yields with the boom in U.S. energy production.

5) According to industry figures, over the past 10 years, MLP market cap growth has grown from $25 billion to $350 billion.

6) As a result of all these factors; MLPs pay an outstanding yield — currently yielding nearly triple the S&P’s average dividend-paying stock …

Big Fat Yields

Some of the companies I’m looking at right now sport yields of 6%, 7% … 9%!

Heck, even the funds that hold baskets of MLPs, which usually pay lower yields than you can find on individual issues, are paying yields of more than 4%.

For example, the UBS E-TRACS Alerian MLP Infrastructure ETN (MLPI) recently sported a dividend yield of 4.94%.

That’s more than DOUBLE the yield on the S&P 500.

Heck, you can even get double-digit dividend yields on some MLPs if you look hard enough. But just remember, with higher yield (usually) comes higher risk.

Yield Isn’t Everything

There are many qualifications that go into a good investment. And you can’t pick a stock, fund or MLP based on yield alone.

You also want to look at the record of dividend growth, return on equity, share structure, free cash flow, earnings growth and more. You want to make sure that the company’s business model is fundamentally sound.

But in an uncertain, volatile market, yield can be and probably should be one of the things you take into consideration when making your investment choices.

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Tomorrow I’ll be talking with you more about why energy stands to offer a gusher of potential profits in 2013, especially when it comes to energy infrastructure. Stay tuned!

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Best wishes,

Sean

Your thoughts on “6 Great Reasons to Start DOUBLING Your Yields with MLPs”

  1. Randy,

    I’m really glad you brought up what type of structure is best for holding MLPs.

    I believe I read that MLPs are disadvantaged when held in a tax deffered account. Evidently what is an advantage in a nondeffered acct. becomes a hindrance in a tax derred one.

    But this is way beyond my expertise. I look forward to .

  2. Can you invest in a MLP within a Traditional IRA or a Roth IRA? And if so, are there any tax ramifications?

  3. HI YOU LEFT OUT ONE ITEM ABOUT MLP.S ABOUT 85 % OF YOUR DIVIDENT IS CONSIDERED RTI WHICH MEANS YOU CAN ESCAPE TAXES FOR BOUT 13 YEARS, THEN GIVE IT TO YOUR HEIRS TAX FREE AND STEPPED UP. JIM

  4. I have been heavily invested in Mortgage Reits for 3 years and your paultry interest ratest of 8 o 9 % make me laugh. Not only have i had significant appreciatin in the shares (from 15-22%) they pay regular dividends of from 14+ to 19.9 %.

    There are some risks associated with all stock, however if you simply watch it closely and read the information available you can do very well in these issues. AGNC-TWO-ARR-MTGE- have beem my main-stays.

  5. The tax advantages are great as are the yields. Right now the fertilizer ETF’s are doing well.

Comments are closed.

Sean travels far and wide to seek out small-cap values in the natural resource sector. His journey started in New England. As a youth he worked on Mt. Washington, on the cog railroad that runs to the summit.