In the past few years, many energy firms in the US have reorganized stable but slow-growing businesses into MLPs or master limited partnerships. There are a few vital differences between buying corporate shares and purchasing a stake in an MLP. With an MLP, investors buy units of partnership rather than stock shares, and they are called unitholders. Here, potential buyers can learn some of the benefits of owning units in an MLP.
Most master limited partnerships have attractive yields, which typically fall into the 6-7% range. This makes them a great low-risk, high-reward proposition for investors on a budget.
Businesses operating as master limited partnerships are usually very stable and have consistent cash flow from one year to the next, making distributions on MLP ownership units extremely predictable.
Many firms switch to an MLP structure as a tax avoidance measure. While shareholders are taxed twice—at the corporate level and the personal level—partnership owners are taxed only when they receive distributions. In MLPs, there’s no equivalent of corporate income tax, and cash distributions are often higher than partnership income; therefore, they are taxed at capital gains rates when the unitholder sells.
Lower Capital Cost
The lack of corporate income taxes gives MLPs a lower capital cost than is usually accessible to corporations, which allows the master limited partnership to pursue avenues that may not be practical for taxable entities.
General Partners’ Compensation is in Line With Limited Partners’ Interest
In an MLP, the majority of general partners receive payment on a sliding scale. That means they get a larger share of cash flow when limited partners’ distributions increase. Here, general partners have an incentive to increase distributions to limited partners.
They’re an Attractive Option for Investors Who Want Income
Master limited partnerships are attractive to investors who are seeking a steady stream of income. MLPs must pass up to 90% of income to investors, and some have yields of over 15%. A company operating as an MLP is typically in a stable, slow-growth field such as energy storage or pipelining, and the nature of such businesses provides ample opportunity for price increases. Conversely, cash distributions are somewhat predictable, which gives the MLP features of fixed income and equity investments. Interested investors can learn more online.