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MLP Investments


Currently MLPs are among the best options for investors who want to secure an outstanding – yet stable – dividend, along with excellent growth prospects for both the stock price and the dividend.

Now, don't worry if you've never heard of these types of income stocks.

Here's a quick explanation, starting with the MLP...

An MLP, or Master Limited Partnership, is a corporate structure where all shareholders are partners in the operation.

To explain this simply, we just need to know that there are two partners in an MLP.

First, there's a general partner, who is responsible for managing day-to-day operations and other affairs – the management team and all the employees of the company – and is compensated based on the venture’s performance.

The other partner is the limited partner, who provides capital. As you might guess, when you buy stock in an MLP, you become one of many limited partners. You're "limited" in that you won't ever get a call from the company to get your opinion on how to run the company (sorry); but since you provide capital for the company, you get a share of the profits (yeah!)...

In fact, MLPs are required by law to pay out virtually all profits to the partners (you!) in proportion to their ownership interest (how much stock you hold).

This is why MLPs pay such high dividends. Also, an MLP is a tax-exempt corporate structure. That's right – you'll pay taxes on your dividend income at the 15% dividend rate... but the company itself doesn't pay taxes, so it avoids the double-taxation loophole to which most dividends are subjected.

This is another reason MLPs are able to pay higher-than-average dividends (technically called distributions).

There's just one more point to make about MLPs: They have to derive 90% of their income from activities in real estate, commodities, or natural resources such as mining, timber, or energy production and related activities.

So an REIT can be a form of MLP. But for the most part, when you hear "MLP," you should be thinking of a company that's involved in oil & gas, mining, or timber.

What's more, most of the MLPs you'll encounter own and operate oil and/or natural gas pipelines and storage facilities.

There are many excellent reasons pipeline companies make such good MLPs. Here are just a few:

  • Once they are built, pipelines and storage facilities don't cost much – just routine maintenance –and they can stay in service for decades.
  • Pipeline companies don't really compete with each other. They stake out different territories, so overlapping pipelines are rare. That's good for revenue and profit growth – which means it's good for dividend growth, too.
  • Pipelines are just big pipes. There isn't going to be any new disruptive technologies to come along and make them obsolete. And you don't have to spend much on R&D, either... Pipelines aren't going out of style any time soon.
  • MLP companies don't care about the actual price of natural gas or oil. They are, in essence, a toll road that collects money based on the volume of traffic – and it doesn't matter to the toll operator whether you're driving a Camry or a Camaro.
  • Many pipelines cross state lines, so they are regulated at the federal level. The Fed likes to tie rate increases to the Producer Price Index, which basically means pipeline companies can raise their fees in line with inflation, so your dividend is likely to rise with inflation. In fact, MLP dividends have risen at 7% annual clip for the last 10 years.

It's pretty easy to see why MLPs make great income investments.

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