A Master Limited Partnership is a limited partnership that is publicly traded. Most people know them as Publicly Traded Partnerships. If you own partnerships in your investment portfolio, you can tell if you own one by looking at your most recent K-1 and seeing if the Publicly Traded Partnership box is checked. Anyway, to be an MLP, or PTP, more than 90 percent of its cash flow must come from real estate, natural resources and commodities. Investors will receive a K-1 every April (or later and then you will have to file for an extension of time to file your return), from which they have to report their share of income, gains and deductions on their personal return. The first distributions from MLPs count as return of investment, not capital gain, which is attractive. Thereafter, after you have recovered your investment, you report your share of the income. Many people are surprised to learn that they cannot offset this “passive” income against their other non-MLP passive losses (only against future MLP losses). An MLP can be advantageous for some investors because of the initial early tax benefits I just mentioned, as well as the additional liquidity from being publicly traded. However, these MLPs are considered more volatile than most equity investments (I would classify them in the emerging market sector) due to their concentration in energy and are not as liquid as ETFs and mutual funds. Additionally, in the very long run, it is the general partners (and not you, the limited partner) that stand to win in the end, as the limited partners get their share of investment returned after providing the initial low-cost funding to the MLP. For an investor that already has a large and well-diversified portfolio among all equity classes and sector types, an MLP might be a possible addition if you are looking to hedge more short-mid term bets in energy. Please consult your financial adviser first.

Master Limited Partnerships trade like shares of public corporations. MLPs are defined as operating in transportation, storage, processing, refining, marketing, exploration, production or mining of any mineral or natural resource. Two of the most significant factors that make MLPs so attractive are that most of them provide a quarterly dividend, or cash payment and they have little correlation to the broader markets. While these securities technically can be bought and sold just like normal stocks, there are significant liquidity, structural and regulatory reasons why they are rarely found in mutual fund or institutional portfolios. As an asset class they are certainly worth considering for a portfolio, but they are complex investment vehicles that you should thoroughly research prior to investing. If you are interested in detailed information Alerian Capital Management has published an excellent primer on MLPs that you can download from the following site: http://www.alerian .com/MLPprimer.pdf

There are pipelines that pay high dividends. They are usually organized as Master Limited Partnerships. MLPs are not corporations but do trade on the major stock exchanges, just like stocks. MLPs have a general partner and limited partners. The general partner manages the operation and you as an individual investor would be a limited partner. The general partner takes a percentage of the profit before you as a limited partner would receive any distribution. Most MLPs are currently paying dividends of about 5 percent to 9 percent in dividend yields. MLPs pay big dividends because they don’t pay corporate income taxes. Instead, the income is allocated to the partners. MLPs offer potential tax advantages because most of their distributions are classified as a return of principal instead of income. You do not have to pay taxes on that portion until you sell your units. When you do sell, you’ll be taxed at ordinary income tax rates and not as capital gains. A downside of MLPs is that they require the use of additional forms when you prepare your taxes. For some investors, this adds too much complication. MLPs are not always good assets for IRAs as they could incur penalties if you collect distributions totaling more than $1,000 annually. Before investing in any asset like a MLP you should consult your financial adviser as well as your tax adviser. They can be a great investment for some but are certainly not for everyone.