The U.S. government wants you to get 7% yields, and then give you a huge tax break on your investment.
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 James Early -- advisor of Motley Fool Income Investor -- 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 an MLP, which pay out nearly all their cash to investors -- something that isn’t available to non-MLP dividend stalwarts like XTO Energy (NYSE: XTO ) or ConocoPhillips (NYSE: COP ) . Because of accounting regulations, MLPs make more in cash earnings than they do in accounting earnings -- it can be something like five 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 those of oil and gas companies and REITs like First Industrial Realty Trust (NYSE: FR ) , Pennsylvania Real Estate Investment Trust (NYSE: PEI ) , and Developers Diversified Realty (NYSE: DDR ) .
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 yielders for the next 10 years. Since I know you’re eager to know more, 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 6.8%. 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.
This article was originally published on Nov. 13, 2009. It has been updated.
Adam J. Wiederman owns no shares of the companies mentioned above. Magellan Midstream Partners is a Motley Fool Income Investor pick. The Fool owns shares of XTO Energy. The Fool’s disclosure policy is outlined here.