How To Produce High Income Using MLPs, Yields Up To 11%

MLPs are structured to produce high income.
Most midstream MLPs are oversold today, offering unique buying opportunities for income investors. Some opportunities yield well over 10%.
MLPs have issues if held in retirement accounts.
We discuss four ways to invest in the midstream sector and how to deal with MLP issues.
We also discuss how non-U.S. investors can invest in the sector and minimize withholding taxes.
Co-produced with PendragonY
Why invest in MLPs
In general, income investors are attracted to midstream oil and gas MLPs (master limited partnerships) because most generate high yields with significant tax advantages. MLPs also are popular with investors because they provide attractive exposure to the oil and gas sector, a sector that's usually popular with investors.
Most MLPs are structured to produce immediate income and cash. MLPs, being investment limited partnerships, pay no taxes at the entity level. Each partner pays taxes on her/his share of the income. MLPs, being capital intensive entities, also produce significant depreciation write-offs.
Not paying taxes at the partnership entity level and relatively high depreciation write-offs position MLPs to generate significant cash distributions to the partners. Most of the cash distributions are considered as return of capital that reduce the cost basis of the investment and defer taxation on these distributions.
MLPs share some features with REITs. Both do not cause double taxation at the entity level and at the investor level. However, REITs are corporate entities and are not partnerships. REITs do not provide depreciation write offs and do not pass through losses to investors, MLPs do both. Dividends paid by REITs are taxed at the individual’s ordinary income tax rate. MLPs’ taxation is more advantageous, if addressed properly, but is more complicated to administer. REITs do not require filing of K-1 tax forms, MLPs do.
To realize the full tax advantages, investors... Read more