February 06, 2012 at 11:51 AM EST
Master Limited Partnerships
Brian Hicks talks about Master Limited Partnerships (MLPs) and shows you an income strategy where you literally receive a check in the mail every 3 days.

I'm going to show you an income strategy where you literally receive a check in the mail every 3 ¼ days.

You see, since the financial crisis of 2008, three of the best investments have been-dividend paying stocks like McDonald's (NYSE: MCD), Pfizer (NYSE: PFE), and AT&T (NYSE: T), closed-end funds, trusts and Master Limited Partnerships.

Today I want to tell you about Master Limited Partnerships because, in general, MLPs are heavy in the energy space. Specifically, oil and gas storage and pipelines.

From a current economic perspective, most MLPs provide infrastructure services that are more important than ever before. With oil and gas shale fracking growing by the day, natural gas and oil is flooding the U.S. market.

With so much supply being produced, more and more infrastructure needs to be constructed to handle it. So while America is experiencing a natural gas and oil renaissance, we're also witnessing an oil and gas pipeline boom.

And I'm going to show you how to get a piece of it.

But before I do that, let me explain what a MLP is.

A Master Limited Partnership (MLPs) is exactly that: a partnership. It is a very unique investment that combines the tax benefits of a limited partnership (LP) with the liquidity of common stock.

An MLP has a partnership structure, but issues investment units that trade on an exchange like common stock.

So remember this: an MLP isn't a corporation, but its stock (called units) trades on major exchanges just like a publicly-traded corporation.

In order to qualify as an MLP, a firm must earn 90% of its income through activities or interest and dividend payments relating to natural resources, commodities or real estate. (Hence, why many are oil- and natural gas-based.)

MLPs usually provide their investors, the limited partners, with distributions that are similar to dividends, but taxed differently. And that’s another benefit of an MLP.

MLPs offer potential tax advantages because most of their distributions are classified as a return on investment instead of income. You don't pay taxes on that portion until you sell. However, when you do sell, you'll be taxed at the ordinary income rate, not as capital gains.

In addition to the tax benefits, it is expected that the distribution growth of MLPs can grow at a rate at or ahead of inflation, based upon energy demand and price growth.

Certain MLPs that are more exploratory are more sensitive to the price of oil, while the traditional pipeline MLPs aren't sensitive to commodity prices, but can see increased demand at lower prices.

Additionally, the exploratory MLPs can be super-sensitive to oil spikes in either direction.

Many derive their revenue based on the amount of product transported and are not sensitive to price fluctuations except where they affect demand. Some MLPs involve other natural resources and certain other industries, but oil and gas are the most common.

Because their business isn't tied to the price of the underlying commodity they transport, pipeline MLPs are typically stable and reliable investments for the most part.

Let's take a look at natural gas, for instance.

The price of natural gas has dropped almost 82% since 2008. However, natural gas pipeline MLPs have not only held up, but have made their investors money.

~~wd_nat_gas~~

Take Boardwalk Pipeline Partners (NYSE: BWP), for example. In the last 3 years, BWP has risen nearly 20% while also maintaining a near 8% dividend.

Natural Gas vs. BWP

In fact, Boardwalk Pipeline increased its distribution from $1.89 per unit to over $2.05 in 2011.

This increase occurred while the price of natural gas plummeted to a decade low.

Now, Boardwalk pays its distributions on a quarterly basis. Many, however, pay it monthly, especially their trust cousins.

And we're going to be focusing on monthly income in the future.

Income expert Briton Ryle and I have created a portfolio of dividend payers, closed-end funds, and MLPs and trusts that'll pay you dividends and distributions almost every 3 days. It’ll be released very soon.

The original bull on America,

~~WD_brians_signoff~~



Master Limited Partnerships originally appeared in Wealth Daily. Wealth Daily is a free daily newsletter featuring contrarian investment insights and commentary.
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