I’m a big fan of master limited partnerships (MLPs) — partnerships that trade publicly on an organized stock exchange. Here at Profitable Investing, we’ve made a small fortune on conservatively managed partnerships that focus on “toll taker” aspects of the energy industry, such as pipelines and natural-gas gathering and processing.
The very first MLP that I recommended to subscribers back in 1991, Buckeye Partners, L.P. (BPL), forms an important piece of our model portfolio today. Since that initial writeup, BPL has racked up a spectacular total return of more than 3,200%.
Yet the outlook for MLPs today is, if anything, more favorable than it was back then. During the past five years, an energy boom has taken hold right here in the U.S. New drilling technologies (such as “fracking”) have boosted domestic production of crude oil by 49%. Natgas production has also soared with the tapping of newly discovered reserves in the nation’s shale deposits (Marcellus, Utica, Eagle Ford, etc.).
MLPs supply much of the infrastructure for transporting oil and gas from these fields. So the partnerships find themselves in a powerful growth spurt that could last another decade or more.
Those Nasty K-1s
From an investment standpoint, MLPs also offer the attraction of generous cash yields up front, partly (or even mostly) tax deferred. Growth, income, plus a tax break — what’s not to like?
Well, just one thing.
At tax time, MLPs send you a complicated Form K-1, along with a mass of instructions — written in pure legalese — for reporting your share of the partnership’s income and deductions. It’s a headache for your tax preparer (read: extra fees on your bill), and an even bigger headache if the preparer happens to be you.
Adding insult to injury, many MLPs don’t release their K-1s until the middle or even the end of March. So you’ve got to hustle to get your taxes filed on time.
Personally, I’m willing to put up with some of that grief to capture the outsized returns available from MLPs. As I get older, though, and maybe a bit less patient with tax gobbledygook, I’m more inclined to look for shortcuts.
I’ve found two types of “paperwork cutters” in the MLP space that work for me. Let’s talk about the pros and cons of each of them.