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What Is An MLP?

Posted on | May 20, 2011 | Comments Off

An MLP refers to a Master Limited Partnership or a publicly traded limited partnership. Shares of the ownership are often referred to as “units.” Often times you will see MLPs operate in energy sectors and sometimes financial (real estate).

A corporation is typically viewed as a separate, stand alone entity. An MLP is not considered an entity but rather the aggregate of the partners that own “units” of the partnership.

The reason we care about this is because MLPs don’t have corporate taxes. Instead, the partners of the MLP are required to take care of taxes on their own with regards to the MLP’s income and/or gains. This enables what some call “pass through income.” The taxes that a unitholder or “partner” is responsible for with regards to their ownership is detailed in the K-1 form that the MLP is required to mail to each unitholder every year.

MLPs make dividend payments regularly, but are actually more called “distributions.” Often times, MLPs pay a higher yield than most Corporations because of the structure of the organization.

Investors can earn nice cash flow from MLPs so they definitely warrant consideration in your portfolio. The main questions to ask about a specific MLP are as follows:

  1. Does the MLP generate sufficient cash flow to cover the distributions at the current level?
  2. How can the MLP grow the cash flow and thus the distributions to unit holders?
  3. How does the macro picture impact positively or negatively the business that the MLP is in.  Think real estate vs energy, etc.

As we move forward, I’ll continue to update you with some MLP recommendations as I see fit.

Note: These types of investments might be good for students looking to learn how to invest.

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Read more on Master Limited Partnership (MLP) at Wikinvest