How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case. ”
– Robert G Allen, Canadian-American financial writer of NY Times bestsellers Nothing Down, Creating Wealth and Multiple Streams of Income
It is but obvious that in order to create wealth, you need to invest. However, you have been burnt at the stock market when the Dow crashed in 2008. In spite of the recovery in 2010, you still find it difficult to repose faith in stocks. At the same time, you feel that hoarding cash is a waste of resources. Ideally, you would like to invest in something that can deliver strong returns but without the volatility of stocks. Is there anything on the investment horizon that can satisfy your requirements?
Yes, there is – MLPs or Master Limited Partnerships. Although they have been around for quite some time, it’s recently that they have entered public consciousness. Currently the MLP market stands at $200 billion and is all set to grow stronger, combine as it does reasonable returns with a measure of safety. Let’s be clear about this – if you are looking for spectacular gains, MLPs are not for you; invest in stocks. However, do remember that stocks often can result in spectacular losses as well. Lehman Brothers, Merrill Lynch, Citigroup – ring a bell?
On the other hand, for someone desiring a steady return higher than from banks and bonds, but about as safe as them, MLP is the way to go. Simply put, MLPs are companies structured in such a way as to combine the tax benefits of a limited partnership with the liquidity of publicly traded securities. Since these businesses mainly deal with the transfer and storage of commodities that are relatively immune to swings in demand and protected by long-term contracts, the returns are healthy and stable.
Here are some best practices for investing in Master Limited Partnerships:
1. Do your research – Don’t just choose the MLP with the highest dividend yield, because it can be reduced in the future. Instead find one that has a history of growing the company and increasing the dividend. Also, look for smart management who have willingness to hedge their products and materials. For example, an oil company can hedge its oil supply so that it can stil pay stable dividends.
2. Hedge your risks – Protect yourself by diversifying your investment, preferably in different MLPs in different lines of business. Also, you can consider investing in MLP mutual funds to invest in multiple MLPs at one go. SteelPath, a Dallas-based investment advisory firm, announced the launch of the SteelPath MLP Funds, the first of their kind, on 12 May earlier this year.
3. Pay your taxes – Investing in MLPs does make filing taxes a bit more difficult. You receive a K-1 form from the firm that is necessary for the process. Since they arrive quite late in the year, you must be careful to set aside time for this very important task. Nowadays, modern tax preparation software do handle K-1′s just as easily as they do 1099′s, so you are still able to do your own taxes. Also, MLPs are designed to be used in after-tax accounts and should not be purchased in an IRA to prevent loss of tax advantage.