How to Earn Up to 8% Yield with Energy MLPs

Master limited partnerships can turn their tax advantages into big yields for you.

Though master limited partnerships trade like stocks, these securities have unique tax benefits that allow them to “pass through” all their income to investors, without paying corporate taxes. That generally results in solid yields.

What could go wrong: Special tax treatment for MLPs is specifically designed to help foster energy infrastructure in the U.S., so most partnerships are tied to the oil-and-gas industry. Not surprisingly, MLP share prices fell sharply as oil prices crashed over the past year. From its peak last August 29 through its January 13 low, the Alerian MLP index surrendered 21%. Hardest hit were MLPs that generate their income from exploration for and production of oil and gas. Keep in mind, too, that if you invest in an MLP, you’ll have to contend with a K-1 partnership form come tax time.

How to play them: Carefully. For starters, avoid funds that focus on MLPs. They lose the pass-through benefits that individual MLPs enjoy. As for individual firms, Kiplinger’s columnist Jeffrey Kosnett focuses on safety, so he prefers MLPs that “move, process and store all the oil and gas that drivers and everyone else will continue to consume.” His favorites: Enterprise Products Partners (EPD (opens in new tab), $33, 4.5%), Magellan Midstream Partners (MMP (opens in new tab), $77, 3.6%) and Plains All American Pipeline (PAA (opens in new tab), $49, 5.5%).

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Tim Plaehn, analyst for income investing at Investors Alley, a research service, likes Plains, too. He also favors so-called logistics MLPs, which provide services that facilitate the movement of crude oil and refined products. His recommendations: Delek Logistics (DKL (opens in new tab), $44, 4.7%), PBF Logistics (PBFX (opens in new tab), $23, 5.8%) and Western Refining Logistics (WNRL (opens in new tab), $29, 4.6%). For a mega-yield, Plaehn suggests Oneok Partners (OKS (opens in new tab), $41, 7.7%), which gathers, processes, stores and transports natural gas.

Contributing Writer, Kiplinger's Personal Finance
Carolyn Bigda has been writing about personal finance for more than nine years. Previously, she wrote for Money, and is a regular contributor to the Chicago Tribune.