What is a Master Limited Partnership?

Looking for a way to invest in energy and earn a great yield at the same time? Time to take a look at investing in a Master Limited Partnership.

What is a Master Limited Partnership?

Master limited partnerships are one of the 16 income investing strategies we teach here at the Income Investors.

Most people think of MLPs as energy pipeline companies with an advantageous tax structure.

All partnerships in the US, including MLPs, pay no income tax at the partnership (or company) level.

Unlike most partnerships, MLPs are public companies, trading on the major stock exchanges.

The 4 Types of MLP Businesses

1. Transportation
Transportation MLPs move energy commodities like oil and natural gas from one place to another. Most North American energy travels through a pipeline, but it can also move via truck, railcar, or ship. Transportation MLPs are the cornerstone of the asset class.

2. Processing
Processing encompasses any business that transforms the raw product into a useable form. It could involve removing impurities like water and dirt, as well as separating raw energy into pipeline-quality natural gas and natural gas liquids (NGLs), which are used as heating fuels and industrial raw materials.

3. Storage
These are tanks, wells, and other storage facilities both above and below ground. They provide flexibility to the cyclical energy economy, so we have propane available for winter heating, gasoline for summer driving, and jet fuel for the holidays.

4. Production and Mining
This encompasses both exploration (searching for energy underground in its various raw forms) and production (bringing it to the surface). This includes crude oil, natural gas, coal, and frac sand.

How Investors Make Money With MLPs

If you own a stock, there are two ways to make money.

1. The price of the stock increases and you can sell it for more than you bought it. Formally, this is known as price appreciation.

2. The stock pays you dividends.

MLP dividends are called distributions because of the partnership structure, and the amount of distributions relative to the share price is known as yield.

The historical average yield of MLPs over the past 10 years has been around 7%, which means that if you invested $100, on average, you would be paid $7 each year.

As a comparison, Real Estate Investment Trusts (REITs), which are asset classes known for their income potential, have about a 4% yield.

The S&P 500 has around a 2% yield.

Unlike REITs, which must distribute a certain percentage of their cash flow each quarter, the partnership agreements of individual MLPs determine the level of distributions.

Typically, MLPs pay out between 80%-100% of their cash flow.

That's some sweet, sweet income!

Wondering how to get information on the MLP's available to invest?

Alerian MLP Index

The Alerian MLP Index is the leading gauge of energy Master Limited Partnerships (MLPs). They track 42 MLPs representing about 85% of the total MLP market cap.

You can see from their chart how MLP's (shown as the index ‘AMZ') have outperformed other indices by yield…

master limited partnership yields

My Top 3 Master Limited Partnership Ideas

As always, please consult with your financial advisor. These recommendations are based on my personal knowledge and insight. They may not be correct for your portfolio at the given moment you wish to invest.

That being said, here are my ideas for your next MLP investment:

  • Enterprise Products Partners (EPD): Enterprise Product Partners is a master limited partnership that transports and processes natural gas, natural gas liquids, crude oil, refined products and petrochemicals. The current dividend yield is 5.93%. And as of today, it's trading at an 18% discount to its fair value of $35.50/share.
  • AmeriGas Partners (APU): AmeriGas Partners is the largest retail propane marketer in the United States. The company sells about 1.1 billion gallons of propane annually to 1.8 million customers across a diverse footprint in all 50 states. The current dividend yield is 9.41%! And as of today, it's trading at a 12% discount to its fair value of $46/share.
  • Buckeye Partners (BPL): Buckeye Partners provides transportation, storage, and marketing of liquid petroleum products. The current dividend yield is 13.96%! And as of today, it's trading at a 20% discount to its fair value of $45.07/share.

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