In today’s investment climate, investors seeking income are facing tough challenges. Considering that U.S. 10-year treasuries are yielding less than 1.5 percent and most money markets are less than 0.5 percent, where is an investor to turn for income? Frequently, investors look at high-yield bonds and so-called “value” stocks (or stock funds) that focus on companies paying hefty dividends. Some investors turn to REITs, real estate investment trusts, for an additional source of income. This article discusses another type of investment that is often employed for yield: master limited partnerships (MLPs).
MLPs offer a “partnership” share in an endeavor, such as a natural gas pipeline, coal mine, oil, shipping concerns, etc. The investor — the limited partner — buys an ownership stake in the partnership, the shares of which trade on traditional exchanges, like stocks. Publicly traded MLPs primarily focus on energy-related activities, such as the exploration, marketing, transportation, processing, production, refining or storage of a wide array of natural resources, but mainly oil and gas. Currently, there are approximately 100 public MLPs trading on the major exchanges. MLPs are generally suitable for investors who are seeking a source of regular income payments, motivated by yield or want a combination of potential income and growth. That stated, most investors and their advisers are driven to MLPs for their income potential, especially with interest rates currently at historic lows. The majority of MLPs are currently yielding a minimum of 5 percent, which makes this asset class very intriguing. Most MLPs distribute the vast majority of net profits (up to 90 percent) to the limited partners/shareholders.
