What Is a Master Limited Partnership (MLP)

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What is an MLP? MLP in the investment world means Master Limited Partnership. MLPs have generated some of the best returns for the past decade, and yet it's a secret to most investors. I found out about them only three years ago.

They are publicly traded, and you can purchase one of many of the security exchanges. MLPs combine the tax benefits of a limited partnership, with the liquidity of a publicly traded security. It is known to some as a granny investment; they generate steady income, can appreciate like a stock, and have good tax benefits. I happen to love them since they are very similar, in tax advantages, to owning your own business.

Master Limited Partnerships are limited by US tax code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum, natural gas extraction and transportation. Some real estate enterprises may also qualify as MLPs.

In addition, some private equity management companies such as the recently gone public, Blackstone Group (BX) and Fortress Investment Group (FIG) are structured as MLPs. Many MLPs generate 7 – 8% dividend yields and most are tax-deferred. For many large master limited partnerships, 70% or more of their dividends are tax-deferred.

Advantages of an MLP?

  • MLP distributions are high and consistent. Average yield is in the 8% range.
  • MLPs have consistently increased their distributions over time.
  • MLPs have a low correlation to bonds and stocks, which makes it perfect in your asset allocation mix.
  • The corporate structure makes it a favorable tax treatment, and avoids double taxation.

MLP Taxation

MLPs have a big tax advantage compared to stocks with dividends and other assets classes. It's a perfect investment to put into taxable accounts. While you can put an MLP in an IRA or other retirement account, it is not recommended because of the tax complexities.

With MLPs, you should practice a buy and hold mentality because of the tax implications. When selling a long-held MLP, the cost basis can be high because of the many years of dividends (they are really distributions).

With an MLP you do not get a standard 1099 form and get a K-1 tax form instead. Unlike dividends, these distributions are not taxed when they are received; instead, they are considered reductions in the investment's cost basis and create a tax liability that is deferred until the MLP is sold. Because of this deferral, unit holders often pay an effective tax rate of under 10% of annual distributions. Depending upon your tax situation, this rate can fall as low as zero in some cases.

MLP List

Here is a partial list of MLP stocks.

  • Boardwalk Pipline (BWP)
  • Enbridge Engergy (EEP)
  • Enterprise Product Partners LP  (EPD)
  • Kinder Morgan Energy (KMP)
  • Magellan Midstream (MMP)
  • Plains All American (PAA)


For anyone who's looking for a steady income and nice tax deferral, an MLP might be something you want to add to your taxable portfolio.

Disclosure:  I own shares of PAA and MMP.

Larry Ludwig

Larry Ludwig was the founder and editor in chief of Investor Junkie. He graduated from Clemson University with a bachelor of science in computers and a minor in business. Back in the ’90s, I helped create some of the first financial websites for firms like Chase, T. Rowe Price, and ING Bank, and later went on to work for Nomura Securities. He’s had a passion for investing since he was 20 years old and has owned multiple businesses for over 20 years. He currently resides in Long Island, New York, with his wife and three children.

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  1. I have avoided Master Limited Partnerships (MLPs) because of their complexity and tax complications. Most people don’t want to deal with the extra efforts required. I do think your readers now have a better understanding of a growing investment vehicle. Thanks for the information.

    1. Hey Ken,
      Yes they are much more complex than other traditional investments and are a buy and hold type of investment. With that said if you already have an accountant, the complexity on your part is minimal.

      1. Michael,

        Unless you want to make your life very difficult, MLPs should NOT be placed within tax deferred accounts. Speak to an accountant/tax advisor for the details. Either way if most of the income is tax deferred, why put it into a tax deferred account?? You want MLPs in taxable accounts because of this reason.

        1. I should have clarified, sounds like a perfect investment for a ROTH. I doesn’t matter what the tax situation would be in the ROTH, it would not be a consideration when you want to get your cash out at retirement.

          1. If you are really hard up for investing in MLPs in a tax sheltered account there are now MLP ETFs that don’t have the issue an individual MLP has with tax reporting.

  2. MLPs are NOT stocks or corporations – they are just what the name says – a limited partnership.

    You also failed to discuss tax disadvantages:
    1) MLPs necessitate filing of Schedule E to report the investors share of pass-through income, and usually get into very complicated issues like passive activity losses and at-risk limitations.
    2) pass-through income from an MLP is taxed at ordinary income rates, instead of the lower qualified dividend rates for stocks and certain mutual funds
    3) sale of an MLP interest will usually result in both ordinary income and capital gain
    4) MLPs usually have higher investment minimums than stocks or mutual funds

    Of course, as a CPA I love to see people invest in MLPs since the tax forms involved are usually too much for the average Joe to deal with.

    1. "MLPs are NOT stocks or corporations" You are correct. I'll fix that wording so it’s clear.

      Good points on the disadvantages. Yea in my case I already have an accountant so didn't even consider that an issue. Shh… I'm trying to give you more work 😉 (meant sarcastically)

      On point #3 it's briefly mentioned in the article but not discussed in depth.

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