Some master limited partnerships (MLPs) are operating businesses such as pipelines, with a connection to oil and gas. MLPs tend to be structured so that there’s no tax paid at the entity level, leaving ample amounts of cash to flow through to investors.
What’s more, unrelated business taxable income from MLPs may be an issue for tax-exempt investors such as pension funds and endowments. Because institutional investors won’t buy them, Wall Street doesn’t research MLPs very heavily. They tend to be under-followed and under-tracked, which can lead to relatively low prices and high distributions.
Investors interested in energy-related MLPs can buy specific issues such as Buckeye Partners, which engages in the transportation and storage of petroleum products.
Alternatively, you can invest in MLPs through publicly-traded closed-end funds, for diversification as well as for simplified tax reporting. Closed-end MLP funds have been paying around 6-6.5 percent while any taxable dividends may qualify for the 15 percent rate.
Among closed-end funds holding energy-related MLPs are Energy Income and Growth Fund, Kayne Anderson MLP Investment Co., and Tortoise Energy Infrastructure Corp.
