While a master limited partnership (MLP) sounds complex in theory, in practice it is much more simple and easy to understand
Assuming that an MLP is suitable for your portfolio, it can actually be a very sensible and profitable investment. As described below, there are numerous advantages to including an MLP in your personal finance portfolio.
New York City-based investment firm, Hilton Capital Management explains that they include the MLP in many client portfolios.
“We have a Tactical Income strategy that creates a diversified portfolio of income producing securities that offer the potential for capital appreciation,” says the company blog.
While limited partnerships tend to be esoteric and opaque in general, an MLP provides the extra transparency that is necessary to make the investment safer.
MLPs are simply publicly traded limited partnerships. The fact that a security is traded on a securities exchange means that there are several extra levels of disclosure that needs to made in order for a security to both be listed and maintain its listing.
Another benefit is that the MLP will have a liquid market. Limited partnerships are generally difficult to exit. However, when it is publicly listed, there is a ready market for shares.
Specifically, what this all means is that when you are purchasing shares in an MLP, you become a limited partner in the MLP. There is a general partner that will run the day-to-day business operations of the MLP and will make all of the business decisions.
Your investment will earn you a share of the profits of the limited partnership, which is paid out in the form of dividends. You do not need to do anything other than make your initial purchase. Where this may help your portfolio is that MLPs are required to pay out their earnings in the form of dividends, as opposed to regularly listed companies who may retain the earnings in the business. As a result, an MLP will usually have a tempting dividend as long as there are earnings, and there usually are.
Concentrated In The Oil And Gas Industries
Since earnings and dividends are the primary goals of those who invest in MLPs, these securities usually end up being in steady industries where there is a relatively predictable income. This is typically something that you will want to invest in for the long-term, assuming that your personal finance goal is an income-generating security.
However, you will need to make sure that you understand the accounting issues that come with buying an MLP because dividends may not be treated the same as they would be if you owned a dividend-paying common stock.
Long term investors should seek steady returns as opposed to trying to rack up large gains quickly.
It is the pursuit of outsize returns that causes investors to take needless chances that can eat into their underlying capital.