MLPs also have relatively low liquidity in terms of trading volume, so they're not easy to trade in and out of if you want to take large positions. MLP investors receive K-1s instead of 1099s because they're partners in a partnership-not corporate shareholders. MB: MLPs present some additional tax-filing burdens that you don't find with C-Corp investments. On a relative basis, yes, the MLPs become more attractive. This will not impact MLPs in terms of their distributions. MB: Yes, the recent 3.8% tax on interest dividends, annuities, etc., which also includes families earning more than $250K. I suppose this makes MLPs even more attractive. TER: Recent healthcare legislation will tax dividends for people making more than $200K/year but will not affect MLP distributions. About 70% of MLPs are owned by retail investors, and retirees own them for the income. MB: Yes, I would consider them long-term investments they certainly own long-lived assets. TER: Does that mean that MLPs are long-term investments? From a tax perspective, it can be very efficient for investors. The rest of the tax is deferred until the investor sells the security, which could be many years in the future. Investors are required to pay tax on only 20% of that distribution, typically. MB: The basic value proposition for an MLP investor is a low double-digit annual total return consisting of a 6%-8% yield with 3%-5% annual distribution growth and certain tax-deferred advantages. Therefore, MLPs have pretty high yields, averaging between 6%-8%. MLPs distribute available cash flow-cash left over after paying debt service, maintenance, etc.-at the end of each quarter to their unit holders. Many MLPs operate pipelines and storage facilities, so they generate pretty stable cash flows with little direct commodity risk. Most energy MLPs provide midstream services (i.e., they handle various commodities for a fee).
For practical purposes, MLPs are involved mostly in the energy sector-of the 91 publicly traded MLPs, 71 are involved in energy. To be eligible as an MLP, the partnership has to receive at least 90% of its income from what's called qualifying sources (natural resources, real estate rents and dividend income). Investors receive cash distributions instead of dividends.
The difference is that MLPs are structured as partnerships they don't pay corporate taxes at the partnership level and investors avoid double taxation. Michael Blum: Master limited partnerships are high-yielding publicly traded entities, which trade on major exchanges similar to a corporation.
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