Bill Gross, a well-known investor, has recently shown his support for MLP pipelines as an income-oriented investment. He highlighted that MLPs have shown significant growth over the past year, outperforming many other types of investments. This surge in MLP popularity is closely tied to the rising energy prices, with West Texas Intermediate crude futures and Brent futures experiencing substantial increases. MLPs offer investors an opportunity to capitalize on the exploration, transport, and processing of oil and gas. In addition, they typically offer attractive dividend yields, making them an appealing option for income-focused investors.
While oil remains a hot commodity in the current market, some experts believe that natural gas could be the next frontier for pipeline investors. Despite a recent decline in natural gas futures, there are promising growth prospects in this sector. Stephen Ellis, an energy and utilities strategist, has suggested that focusing on natural gas over oil may offer more attractive opportunities for investors, particularly in the midstream segment. Companies such as Energy Transfer, Enterprise Products Partners, and Targa Resources are highlighted as potential investment targets in the natural gas space.
Business Structures and Tax Implications
One key advantage of investing in MLPs is the unique business structure that they offer. Unlike traditional C corporations, MLPs have a structure that allows them to avoid double taxation, resulting in higher dividend yields for investors. General partners manage the day-to-day operations of the MLP, while limited partners provide capital and receive income distributions. While this structure can lead to higher yields, it also introduces tax complexity for investors. MLP investors are required to deal with Schedule K-1 forms, which may not be received until mid-March or later, potentially causing delays in filing tax returns.
Investors in MLPs need to be aware of the potential tax implications associated with these investments. Holding MLPs in taxable accounts is recommended to avoid triggering unrelated business taxable income in tax-deferred accounts like IRAs. Additionally, investors should be prepared for the tax complexity that comes with investing in MLPs, as they may need to file tax extensions due to the timing of receiving Schedule K-1 forms. It is important to note that filing for an extension does not extend the deadline for paying taxes, so investors must plan accordingly to meet their tax obligations on time.
Overall, investing in MLP pipelines for income can be a lucrative opportunity for investors seeking high dividend yields in the energy sector. However, investors should carefully consider the tax implications and be prepared to navigate the complexities associated with MLP investments. By weighing the potential benefits and risks of investing in MLPs, investors can make informed decisions to build a diversified income-focused portfolio in the energy industry.