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