Energy prices are on the rise, and this has led to an increased interest in income-oriented investments. One such investment that has caught the attention of legendary investor Bill Gross is MLP pipelines. Earlier this month, the former Pimco investment chief and “bond king” expressed his fondness for MLP pipelines on a social media platform, stating that they are “better than AI”. He noted that these master limited partnerships have seen double-digit growth in the past 12 months.
Impact of Rising Energy Prices on MLPs
The surge in energy prices has positively impacted MLPs. West Texas Intermediate crude futures have increased by nearly 20% in 2024, and Brent futures have risen by 16% due to escalating conflict in the Middle East and production cuts by oil cartel OPEC+. MLPs provide investors with an opportunity to invest in the exploration, transport, and processing of oil and gas. They also offer attractive dividend yields. For instance, Plains All American Pipeline and NuStar Energy, both highlighted by Gross, have dividend yields of 6.8% and 7.1% respectively.
Natural Gas: The Next Big Thing?
While oil is currently a hot market, natural gas could be the next area of interest for investors in the energy sector, according to Stephen Ellis, an energy and utilities strategist with Morningstar. Despite natural gas futures falling by 26% in 2024, investments in this area have promising growth prospects. Ellis believes that there is a demand in Asia for natural gas liquid exports, making it an attractive option for investors. He recommends Energy Transfer, Enterprise Products Partners, and Targa Resources. These companies yield 8%, 7.1%, and 1.8% respectively.
Understanding MLPs and Their Tax Benefits
Master limited partnerships trade on exchanges just like C corporations, but their structure is different, which is the secret behind their high yields. General partners manage the MLP’s daily business, while investors, known as limited partners, provide capital. The MLP then distributes income to the investors. Unlike C corporations, MLPs are not subject to federal income tax, but the limited partners are taxed on the income they receive. This avoidance of “double taxation” allows MLPs to offer attractive yields.
Considerations for MLP Investors
While MLPs offer attractive income, they also come with tax complexities. Partnerships issue a Schedule K-1 to their investors every year, detailing their share of income received. This form may not be received until mid-March or later, which could delay the filing of individual tax returns. Additionally, investors should consider holding the MLP in a taxable account to avoid triggering a tax liability known as unrelated business taxable income.
