The National Association of Publicly Traded Partnerships will host the 2008 MLP Investor Conference in New York on May 21st and 22nd. The event will be held at the Crowne Plaza Hotel in Times Square, and will include sponsors such as Raymond James & Associates. Additional information can be found at the NAPTP website here.
What makes high net-worth investors even richer?
2 things: Information that only a small number of privileged individuals have access to and a mindset which goes beyond the scope of “typical” investments.
These are some of the key reasons why the Master Limited Partnership (MLP) is a high performing security that remains a secret on Wall Street.
Enter the MLP
Typically, financial institutions usually only inform high net-worth clients about MLPs. Why? Because, while they are unconventional and the tax benefits must be fully understood, they are a great way to boost investment returns for these individuals. That is, they have to differentiate their services from those offered to the average Joe in order to keep them as customers (otherwise, they’ll take that $20 million and park it at another bank).
Outperforming the Market
Like a dividend paying stock, MLPs make a quarterly distribution of income to investors. However, that distribution generally is much higher than dividend stocks (which boosts overall returns). For example, the year to date dividend yield is about 1.87% for the S&P 500 and around 2.84% for the Dow Jones utility index.
However, the Alerian Select MLP Index has a YTD yield of over 6%! Plus, just like with a dividend stock, your total return includes both appreciation in share price as well as the return from dividends. In terms of overall return, the Alerian Select Index is up about 10% YTD, while the S&P 500 is up only about 3%. The difference in return is even more pronounced over time:
Looking for the “Catch”
Why can the yield be this high? The answer: pass-through taxation. One of the biggest problems with stocks is that investors are double taxed on earnings. As we all know, a public company must pay tax on money it earns in a given year. With what is left over, they pay dividends. Unfortunately, when you as an investor receive those dividends you are then taxed again!
However, because MLPs are engaged primarily in developing energy resources and infrastructure in the US, the government does not require them to pay taxes at the corporate level. So, they can pass the savings along to investors.
What About Risk?
MLPs are unique because most are engaged in what are called “midstream” energy services. That is, all the stuff involved with getting a commodity such as oil or natural gas from the source (i.e., the well) to its destination (customers). This includes pipelines (which make money by charging essentially a “toll” to ship commodities) as well as services (separating natural gas into components that can be used such as propane, ethane, etc.).
As a result, they reduce their exposure to fluctuations in the price of oil and gas because they are just the shipper. It doesn’t matter how expensive a given commodity is, it still needs to get from point A to point B. While prices can cause the amount shipped to vary, the impact is mitigated since the MLP doesn’t have direct price exposure.
However, it is important to note that MLP units may vary in price more than stocks in the near term. This is because large institutions have been slow to invest in these securities. Therefore, big trades by larger investors can cause price volatility over the short run. This doesn’t impact the underlying value though - as most MLPs have steady, dependable income and tangible, fixed assets (i.e., pipelines). Long term, the potential is clear: we will still need oil & gas, and we will still need to ship oil & gas from point A to point B.
Additional Benefits
Related Links:
Subscribe in a reader
Or, subscribe via email: