Master Limited Partnerships (MLP) are essentially a close business alliance of multiple companies involved in the same market field. Most of these are found in the energy sector. MLPs act as both publicly traded corporations but legally exist as limited partnerships. This distinction is important in terms of certain tax advantages offered through a loophole in the current law through which investors in an MLP setup can avoid the double-dipping that occurs with investment in a single company. Investors are not shareholders but unitholders. This means they pay income taxes only on the units in the MLP and not any corporate tax liability on top of that.
If you want to know exactly how an energy sector MLP index fund can provide steady long-term income for the unitholders, imagine a gold rush. Thousands of miners and goldpanners go out into the fields hoping for that big strike. However, those panners and miners need supplies: food, tools, clothing, utensils, tents, etc. The only place in the gold fields anyone can get these goods is through the general store.
That’s what an energy sector MLP is. The companies in the partnership group are those companies which supply and facilitate the large energy company operations. They own refineries, pipeline suppliers, transport assets such as tanker trucks and rail tankers, storage facilities, and supply parts and tools for exploration and extraction operations. They’re the General Store. That means every time oil or natural gas has to be conveyed through pipe, they get their cut. Every time oil or gas has to be transported anywhere, they get their cut. Anytime coal has to be shipped by rail or water, they get their cut. Energy MLPs make their money on the activities of the energy industry rather than the commodity prices.
Energy MLPs have provided consistent and steadily rising returns on investment for their unitholders for minimal risk and reduced tax liability. This combination adds up to potentially substantial income both short- and long-term. According to these guys here, there are three MLPs which offer yields between 5% and 9% returns on investment. These partnerships appear to not only have very strong performance in the market but fantastic long-term prospects down the line. Investors seeking the best possible returns would do well to investigate further and make the choices that will work best for their own long-term strategies and security.