The Best Yields for the Next 10 Years

The U.S. government wants you to get 7% yields, and then give you a huge tax break on your investment.

But it won’t come from investing in the well-known dividend payers like Kraft (NYSE: KFT  ) or Merck (NYSE: MRK  ) -- despite their obvious appeal for yield-hungry investors.

If you’re like me, you’re probably chuckling in amusement. The government … giving away tax breaks… on yields earned from investments? Impossible!

But actually, it’s 100% true. As Motley Fool Income Investor advisor James Early clarifies, “Technically, Uncle Sam simply wants to promote energy infrastructure, but if that also means promoting our pocketbooks, we’ll take it.”

And take it we will
The investments I’m referring to are “master limited partnerships,” or MLPs. Back in the 1980s, Congress wanted to expand the growth of oil and natural gas pipeline facilities across the country. Since they allow citizens the right to form partnerships (which don’t have to pay corporate taxes), these MLPs are able to have more money to invest in new projects, thereby advancing Congress’ agenda.

But it gets even better. There is also a hidden tax benefit for the individual who owns units of a MLP, which pay out nearly all their cash to investors -- something that isn’t available to non-MLP dividend stalwarts like Chevron (NYSE: CVX  ) and ExxonMobil (NYSE: XOM  ) . Because of accounting regulations, MLPs make more in cash earnings than they do in accounting earnings -- it can be something like 5 times as much. But investors in MLPs are only taxed on the lower, accounting earnings, while it is a share of the larger, cash earnings that they actually receive.

Now is the time to get in
The yields on MLPs are -- quite simply -- astronomical, even before you add in the tax benefits. MLPs frequently yield 7%, and sometimes even higher than that. Yet most investors are missing out.

Moreover, because MLPs run monopoly-like toll businesses, their cash flows are less tied to speculation than oil and gas companies and REITs like Simon Property Group (NYSE: SPG  ) , ProLogis (NYSE: PLD  ) or Vornado Realty Trust (NYSE: VNO  ) .

A Wells Fargo analyst recently praised MLPs for the “fee-based stable nature of their cash flows, the diversity and breadth of their assets, investment grade credit rating, and superior access to the capital markets.”  And the analyst's two favorite MLPs are also currently recommended by James Early in his Income Investor newsletter.

For all these reasons, James believes that MLPs will be among the best yields for the next 10 years. Since I know you’re eager to know what they are, I will tell you that one of the MLPs is Magellan Midstream Partners, which operates a massive pipeline system running from Texas through the Midwest, and currently yields 7.3%. To see the name of the other -- along with all the MLPs that James believes are fantastic investments today -- I invite you to check out his Income Investor service, completely free. You can read all about MLPs -- plus his other favorite dividend payers -- and see which ones he likes, free for 30 days. Simply click here for more information. 

Adam J. Wiederman owns no shares of the companies mentioned above. Magellan Midstream Partners is a Motley Fool Income Investor pick. The Fool’s disclosure policy is outlined here.


Read/Post Comments (16) | Recommend This Article (60)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 13, 2009, at 4:38 PM, 30YearsLeft wrote:

    I like the idea of MLP's. Has anyone looked at investing in AMJ. It is an ETN from JP Morgan that invest in MLP's, but you don't have to deal with all of the tax forms. You lose a small percentage of the return which is accetable to me. The main draw back is that it is tied to the credit rating of JP Morgan, so it isn't secured.

  • Report this Comment On November 13, 2009, at 4:49 PM, 30YearsLeft wrote:

    Has anyone looked into AMJ. It is the ETN that invests in MLPs. They have a small fee (less than .5 percent), but you don't have to deal with the tax paperwork either. The downside appears to be that the ETN isn't secured, so it is tied to the credit rating of JP Morgan.

  • Report this Comment On November 13, 2009, at 8:15 PM, keith134 wrote:

    Be aware of the tax implications of owning an MLP. If you want to avoid such headaches then investigate KMR and EEP which utilize a slightly different model (paying distributions in stock much like a minisplit.) Owning either of these does not require dealing with a K1.

  • Report this Comment On November 14, 2009, at 10:10 AM, v00doochild wrote:

    Top 50 list of the highest dividend yielding S&P 500 Dividend Aristocrats (Dividend aristocrats are companies in the S&P 500 that have increased dividend payouts to shareholders every year for the last 25 years.):

    http://www.TopYields.nl/Top-dividend-yields-of-Dividend-Aris...

  • Report this Comment On November 15, 2009, at 10:43 AM, TMFDonauschwaben wrote:

    30YearsLeft,

    I can understand why you might be inclined to have an MLP ETF or ETN as an alternate strategy, but my main issues with that alternative to what I mentioned is both the fees (which you mentioned) and the fact that it also has less-great companies bunched in with the top-notch ones.

    You'll certainly get somewhat comparable results, but overtime, the difference between top-notch results and middle of the road results can add up.

    -- Adam

  • Report this Comment On November 15, 2009, at 10:48 AM, TMFDonauschwaben wrote:

    keith134,

    You are right... the tax implications of owning an MLP are something to be cognizant of.

    Typically, MLPs don't make sense in tax-advantaged accounts like IRAs and 401(k)s.

    Each year, you will receive a K-1 allocating your portion of the MLP's income, loss, etc.

    Each investor is in a different tax position, so it'd be best to discuss the tax implications of owning an MLP with your lawyer or accountant.

    But thanks for bringing up the issue -- it is something investors should take into consideration.

    -- Adam

  • Report this Comment On November 15, 2009, at 11:53 AM, Schwaggz wrote:

    I think if an MLP is sued, they can go after all the unit holders dividends up to 7 years back.

    Someone please verify.

  • Report this Comment On November 16, 2009, at 10:30 AM, TMFDonauschwaben wrote:

    Schwaggz,

    I do believe that, on a legal level, you are correct. Because MLPs are "limited partnerships," the partners (unitholders) have "limited liability," which means that they are, to a certain extent, responsible if the MLP is sued. The liability wouldn't exceed the amount of your investment.

    However, from what I have researched, I don't think there has yet been an instance in which the unitholders have been forced to be held legally accountable. Of course, that's not to say it will never happen...

    But as with any investment, you have to take the risk and reward into consideration. By and large, MLPs have stable cash flows, large dividend payouts which typically grow over long periods of time, and are tax advantaged. So, in my opinion at least, the rewards of owning the best MLPs vastly outweigh the small risk that you mentioned.

    Thanks for bringing the issue up!

    -- Adam

  • Report this Comment On November 16, 2009, at 6:40 PM, MAcDScientist wrote:

    Your recommendation of Magellan Midstream Partners (MMP) surprises me. Latest 6 months financials shows net income at only about 50% of 2008 period. And, income per unit is even less than 50% (.8 vs. 2.). How can they continue to maintain their distribution with such a reduction in cash? MMP recently issued bonds - I hope some of the cash from that issue doesn't go to maintain distributions. What say you?

  • Report this Comment On November 17, 2009, at 1:37 AM, MacNeil2005 wrote:

    Couldn't you deal with a Schedule K in TurboTax?

  • Report this Comment On November 17, 2009, at 1:43 AM, MacNeil2005 wrote:

    Couldn't you deal with a Schedule K in TurboTax?

  • Report this Comment On November 17, 2009, at 8:38 AM, TMFDonauschwaben wrote:

    MacNeil2005,

    Turbo Tax should be able to handle your Schedule K.

    -- Adam

    MAcDScientist,

    A lot of companies have lower net income over the past year, so I don't think that's enough to write off a recommendation of MMP. Why is it down so much? Well, part of MMP's income is commodity sensitive. So when oil was sky-high a year earlier, that portion of their income was jiving, but not so much now that oil prices have been cut in half. But I still think it's a strong long-term investment, especially with that 7.1% dividend!

    -- Adam

  • Report this Comment On November 17, 2009, at 8:54 AM, TMFDonauschwaben wrote:

    MacNeil2005,

    Turbo Tax should be able to handle your Schedule K.

    -- Adam

    MAcDScientist,

    A lot of companies have lower net income over the past year, so I don't think that's enough to write off a recommendation of MMP. Why is it down so much? Well, part of MMP's income is commodity sensitive. So when oil was sky-high a year earlier, that portion of their income was jiving, but not so much now that oil prices have been cut in half. But I still think it's a strong long-term investment, especially with that 7.1% dividend!

    -- Adam

  • Report this Comment On November 18, 2009, at 7:57 PM, plantoretire1day wrote:

    How do you invest in a MLP? Do you have to go directly through the company or some other means?

  • Report this Comment On November 19, 2009, at 9:33 AM, TMFDonauschwaben wrote:

    plantoretire1day,

    MLPs like the ones I'm mentioning trade on the major stock exchanges just like your typical stock. So you can purchase them through your broker(age) as with any other stock/fund.

    -- Adam

  • Report this Comment On November 19, 2009, at 9:34 AM, TMFDonauschwaben wrote:

    plantoretire1day,

    MLPs like the ones I'm mentioning trade on the major stock exchanges just like your typical stock. So you can purchase them through your broker(age) as with any other stock/fund.

    -- Adam

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