Monday, Sep. 27, 2010

Income Gushers: Master Limited Partnerships

If "hot stocks" was the brokers' cheer in the '90s, "steady income" is the rallying cry today. Only problem is, as the income theme grows in popularity, actual income is drying up. Treasury bonds are now down to 2.5% on the 10-year note, and bank CDs offer varying shades of zero, as in 0.6% for the one-year. But look beyond the well-trodden path and there are still a few overlooked sources of high yields. "For our clients that are planning for retirement, something we are using a lot right now is master limited partnerships," says Marty Bicknell of Mariner Wealth Advisers in Leawood, Kans. Bicknell, who just placed No. 2 on Barron's list of the nation's top financial advisers, says he likes MLPs, which tend to specialize in oil and gas transportation, for their high yields, predictability ("you're not taking commodity-price risk because they just transport the stuff") and important tax advantages.

One of those advantages is that MLPs, unlike corporations, don't get taxed at the parent level. That leaves more cash to pay out to shareholders; MLP yields often exceed 6%. A second break occurs when shareholders file their taxes, as much of the yield received is classified as a "return of capital" rather than taxable income. That little twist means you don't pay taxes on a big chunk of the distributions until you sell the MLP. "Some of our clients never sell," says Bicknell. Two MLPs he currently likes are Inergy (symbol NRGY), a propane distributor that has been making recent acquisitions, and Enterprise Product Partners (EPD), which operates in oil and gas infrastructure. Both of these securities trade on Nasdaq and can be bought and sold like stocks.