Master Limited Partnerships

If you are looking for dividend income that is tax favored, higher than most stocks, with annual increases Master Limited Partnerships are for you. There are a large number of these stocks and they can be an excellent vehicle for those interested in companies which will allow you to sleep soundly at night and still enjoy 5% plus dividends. MLP dividends are about as safe as it gets and most MLP's raise their payouts annually.

The catch for many people is that all these stocks are tax favored because in effect you generally own something, in most cases pipelines, that produce K-1's at tax time. K-1's generally do not come out until March and unless you are a whiz at tax returns will likely require a paid tax accountant to handle the complexity of the document.

The reason for this is many years ago the US government wanted to help the pipeline, commodities, and coal industry, that is highly capital intensive, to be able to build and grow. So the made the tax law to favor investments but allowing companies who decide to go with this structure to pass on expenses and depreciation to the holders of these securities. So when you get a "distribution" from a MLP you in essence are for tax purposes getting your capital returned in a sometimes tax free for the moment payout. When you sell your stock, the distributions that you were paid, are deducted from your investment, and the gain is taxed at capital gains rate.

Companies who use these MLP structures sign long term contracts that virtually guarantee your dividend. In the case of pipelines it is like having a toll road where there is no other way to distribute your goods and you have to pay to get it delivered. Nice. Personally I tend to favor pipelines when considering MLP's. But lately have been warming up to the coal MLP's since China has been buying tons of American coal.

There are various segments of the MLP industry where one can own pipelines who take a percentage of the cost of the product or just charge a flat fee. You can own pipelines where the oil or gas comes out of the ground, mid stream where it is being delivered to the refinery or storage, or where it is being delivered to the final customer. All have there advantages and all can be good buys. One other note here is that you can own the General Partner stock or the Limited Partner stock. With the GP shares you get a chance at some extra payout when the MLP has a really good year. With the LP shares you get a higher initial dividend with most times no chance of additional payout's in a good year. In return the LP gets good steady dividends that help you sleep at night with usually nice annual increases.

I have only a few times have owned a MLP and likely will not in the future because of the K-1 filings, even though I will admit the task is getting easier with the new tax reporting done by stock brokers and the ease of getting your forms right off the MLP web sites.

I will not recommend specific issues here only to say if you decide to invest here look for the big ones. Remember you are literally signing up to be a partner in a pipeline business. If you would like to consider a MLP e-mail and I will pass on some suggestions.