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Monday, April 12, 2010

MLPs - worth considering for DIYers?

At Saturday's AAII meeting Master Limited Partnerships were the subject of some discussion. Not surprising given today's low yields. Here is a WSJ article that will be of interest to those seeking an understanding of how these issues behave in a rising interest rate environment. Here is a good introduction to these issues.
The essential points are:
1. They offer attractive yields in today's low interest rate market,
2. Their price is volatile and will drop when yields rise - they are stocks,
3. The investor will have additional accounting (headaches) with these issues - companies issue K-1s typically late is the season, there are deferred taxes etc.
4. They should be considered only by longer-term investors.

Personally they are on my radar screen for when short-term interest rates go higher. I am not interested with the Fed holding short-term rates near zero.


  1. What do you think of buying a pool of MLPs through an ETF or low-cost fund? Might shield the investor from some of the MLP tax headaches.

  2. It would lessen the tax headaches. One such is the ETN offered by JP Morgan with ticker symbol AMJ.
    With an ETN, of course, you have to be comfortable with the issuer's credit quality.
    It is worth mentioning that MLPs exist by the grace of Congress. That could could change with Congress looking for revenue anywhere it can find it.
    I would make these a small portion of the fixed income component of the portfolio at best.

  3. So the question is that if what to use this ETF to own MLPs is the .85% fee worth it to avoid the tax headaches and the bite it takes out of the dividend for the diversification it provides?

    Interesting you should mention the possibility that Congress might change the rules for MLP. I believe they just took away the tax exempt status for Coverdale IRA distributions (not that I had one), but it wouldn't surprise me if they don't do the same for Roth IRAs at some point in the future.

  4. If all goes well you net a dividend yield a bit north of 5%.
    Congress really lost a lot of credibility taxing Social Security. It seems whenever I am with experienced investors and a discussion of tax benefits of products comes up, investors mention Social Security.