MLPs, or Master Limited Partnerships, make an attractive investment for investors seeking high income and diversification from other high-dividend yield stocks, such as REITs and BDCs. I’m always surprised to learn when investors tell me they don’t have MLPs in their investment portfolio.
I have approximately 7%-8% of my total net worth invested in companies that operate under the MLP structure. For me, this is the right amount of exposure I want in this sector, which is comprised of mostly oil & gas companies. But you have to be selective in this sector because there are certainly some poorly run companies that don’t produce the returns you are looking for.
Aim for MLPs that have a track record of growing distributable cash flow, which is money available to be paid as distributions to its limited partners (you, the investor) once general partners have been paid.
Instead of chasing the highest yield, I think it’s a smart idea to aim for MLPs that can easily coverage its distributions. I try to aim for a distribution coverage ratio of 1.2X or higher. This means the distribution (aka dividend) is at less risk.
My MLP holdings are held in E*Trade. In this portfolio, I own units of 6 MLPs, along with a non-MLP oil company, a real estate investment trust, and a utility stock. It’s my “high-income portfolio” (“HIP”).
MLP Income Portfolio: My Holdings
Here are my HIP holdings, from largest position to smallest, the stock symbol, and current value.
Enterprise Product Partners (EPD): $5,161
Alliance Resource Partners (ARLP): $4,994
Phillips 66 Partners (PSXP): $4,395
Phillips 66 (PSX): $4,144
MPLX (MPLX): $4,051
National Storage (NSA): $3,670
Energy Transfer Partners (ET): $3,149
WEC Energy Group (WEC): $2,972
Antero Midstream (AM): $2,802
The best part about this portfolio, of course, is the INCOME! While I expect some stock price appreciation, I am really more focused on income.
Over the next 12 months, the portfolio of $35,357 is estimated to generate $2,329 in income, which is mostly from MLPs via distributions.
MLP Income Tax Treatment
MLPs have favorable tax treatment for investors. Distributions are not taxed when they are received by investors. They reduce your cost basis in the investment, and you only have to worry about taxes when you sell your units.
Personally, I plan to just hold my MLPs, re-invest the distributions, and eventually transfer the distributions to my bank account instead of re-investing. I don’t think I will ever sell them entirely.
For more on MLPs and taxes, I would strongly recommend reading up on MLP basics and consulting with a tax professional.
Disclosure: I own units of the above mentioned stocks. This post is for informational purposes only and should not be read as professional financial advice. I am not a financial advisor or accountant. Please do your own due diligence before investing and consult with an advisor or accountant.