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Alternative Investments to Stocks - Round 4: MLPs

As a reminder, this week we are looking at alternative investments to common stocks to hopefully help add some diversification to your portfolio.

So far, we have covered REITs, or real estate investment trusts, preferred shares, and convertible bonds. You can go to hyllandcapital.com/ask to listen to previous recordings and read the audio transcripts.

Today, we’re looking at MLPs, or master limited partnerships.

MLPs are certain structures of businesses primarily in the energy industry that are known for very high dividend yields. MLPs typically offer yields between 8 and 10 percent.

MLP yields.png

In total over the last 22 years MLPs have returned an average annual gain of 11 point 7 percent, with a correlation to US stock of around 0.6. Again, with most of that simply coming from the dividends.

It may be worth noting that these have been terrible investments for the last 3 years or so. Since late 2014, many MLP funds are down 40 to 50%! There have also been some changes to the tax treatments of MLPs recently that may limit their attractiveness for investors.

MLPs are publicly traded partnerships, when you buy a share of an MLP you technically become a limited partner in a business. That opens up a lot of tax implications.

We won’t get into the details here, but MLPs require special tax forms, can create taxable investment income even if invested in an IRA or ROTH IRA, or can supply dividends completely tax free.

At Hylland Capital we have avoided any allocation to MLPs, and use common stocks of larger oil companies for our energy exposure. But these are very popular for investors in need of high income. But just beware of all the complications you can run into by investing in them. Contacting a tax professional or investment advisor would be strongly recommended before investing.

Matt Hylland