Master Limited Partnerships

Haven't posted in a couple days, my following isn't that large, so my motivation is somewhat like a singer or stand up comic with three people in the audience. Ever heard of Master Limited Partnerships? Better yet, do you know what they are? Most likely you don't have any of your portfolio allocated to MLP's. Chances are this little asset class of roughly 70-90 companies in the entire US and Canada are overlooked.

What are they? MLP's are a specific tax structure afforded to a small amount of companies that are involved in the transportation, refinement, distribution of oil, natural gas, jet fuel, propane etc. Basically these companies are essential services to the US to keep energy moving from Canada to the US, from Texas to Massachusetts etc. Essentially if you want to run a pipeline from Montana to Texas and your name is Donald Trump, you can't set this up, you need to get Federal approval. These companies essentially operate a toll booth business model, which is regardless of the price of oil or nat gas as long as it's moving through the pipeline you must pay a toll, Tollbooth Willie Style! http://youtu.be/cyrHxeb_eTI

Taxes? The tolls generated from these pipelines are distributed to shareholders as "return of capital" for the most part and partial income.  Try to follow my example here to get an idea of the distribution and tax structure, this example should also answer the question of why you typically only want to own individual MLP's in non-retirement accounts.  If you buy 100 shares of an MLP at $10 a share, that's a $10,000 investment.  Say for example the first quarter distribution from the company was $1.00 a share or $100.  The $100 distribution is treated as a portion of "return of capital" and "dividend income".  The return of capital lowers your cost basis in the stock.  So in this case, $100 distribution, let's say 80% of the $100 is considered return of capital.  You get $100 in your brokerage account and your original $10,000 investment basis will now be reduced to $9,920.  ($10,000 less your $80 return of capital). The $20 that is income will be taxable in the year of the dividend.  Over time, as you get more and more "return of capital", your cost basis should in theory eventually disappear.  So if your cost basis in the future has been reduced to $0 and you sell the stock, your gain would be taxed at long term capital gains rates. 
Taxes Continued....Because the tax structure is somewhat different than your typical company, the tax forms are often a little different too.  For example, when you bank account or standard mutual fund distribute a dividend or interest, you get a 1099 DIV or 1099 INT at the end of the year.  With MLP's you don't get a 1099 unless you are in a Mutual Fund pool of MLP's or an ETF or ETN.  Individual MLP's get a K-1 tax return at the end of the year.  These K-1's can
be delayed for various reasons, but at the end of the day, they aren't required to be sent by Jan 31st as with your mutual funds and bank account statements.
 
How do I invest?  (You can invest in individual companies, but these are 4 main ways to get basket expsoure)
MLPYX-Oppenheimer MLP 40  6.16% Yield
AMJ-JP Morgan Alerian 4.78% Yield (this an exchange traded note)
AMLP-Alps Alerian MLP ETF  5.94% Yield
MLPAX-Oppenheimer Steelpath Alpha 6.01% Yield

Alan Levine in Financial Advisor Magazine March 2013 highlighted MLP's, compelling article.
http://www.fa-mag.com/news/mlps-performing-well-13475.html

I love MLP's and have owned since 2009, I recommend a 5% allocation to a diversified portfolio.

S&P 500 Dividend Aristocrats Index

The S&P 500 Dividend Aristocrats is a index of large cap blue chip companies that have been paying increasing dividends year after year for at least 25 years. This is an equal weighting index and there is no way of directly investing in an index. These dividend paying companies are across all industries, not just utilities or financials. Compared to the S&P 500 the Dividend Aristocrats have outperformed on 1year, 3year and 5 year basis and past performance is not indicative of future return. Performance as of Dec 2011 1yr. S&P 500. 2.11% 1yr. Div Aristocrats. 8.33% 3yr. S&P 500. 14.11% 3yr. Div Aristocrats. 17.84% 5yr. S&P 500. -0.25% 5yr. Div Aristocrats 4.59% As of March 1st 2013 there are 54 constituents and the top 10 are as follows: Archer Daniels midland ADM 2.37% Abbvie Inc ABBV 4.18% Grainger WW. GWW 1.40% Clorox CLX 3.04% Kimblery Clark. KMB 3.41% Procter & Gamble PG 2.93% Leggett & Platt LEG 3.76% Cincinnati Financial CINF 3.60% Genuine Parts GPC 2.99% Chubb Corp CB 2.07%