Master limited partnerships (MLPs) report their annual tax results on a Form K-1, for partnerships, rather than the 1099s used to report stock dividends. Therefore, it doesn’t make sense to own only 100 shares of one MLP, even if it has a high payout. The extra income you’ll receive won’t be enough to offset the added costs of tax preparation.
You might want to hold 5 percent-10 percent of your portfolio in MLPs, enough so that the extra cash flow exceeds the costs. You should hold at least five issues to get a good mix of companies, perhaps one propane MLP, one in coal, and three pipelines.
Pipelines are paid predictable, regulated fees that may rise in line with inflation. Moreover, those fees are paid for transporting petroleum products so such MLPs are not exposed to fluctuations of energy prices.
Because pipelines are the lowest-cost means of moving oil and gas, their revenues are not as sensitive to the vagaries of the economy or world events. After the September 11 attacks, for example, the volume of jet fuel went down but gasoline was up, as an offset, as people did more driving. Long-term, economic expansion is likely to lead to more energy use, greater revenues for pipelines, and higher distributions to investors. For a list of MLPs, including pipelines, go to http://www.ptpcoalition.org.
