Master limited partnerships (MLPs) are limited partnerships (LPs) that trade publicly on a stock exchange. They provide investors with the best of both worlds. MLPs capitalize on the tax advantages of investing in an LP, while offering the liquidity of a publicly traded company (i.e., investors can buy and sell MLPs through their brokerage accounts).
Overview
Understanding master limited partnerships (MLPs)
The IRS treats MLPs as limited partnerships for tax purposes. LPs are pass-through entities, which means all profits and losses, as well as any deductions for depreciation, pass through to limited partners, who report them on their tax returns. MLPs don't pay any corporate taxes.
Limited Partnership
MLPs must get at least 90% of their income from qualifying sources to maintain their tax-advantaged status. In 1987, Congress limited the sources of qualifying MLP income to the real estate and natural resources sectors. Qualifying income includes earnings realized from the exploration, production, or transportation of natural resources or real estate.
MLPs have a few other notable differences compared to traditional corporations:
- MLPs have units, while corporations have stock or shares.
- MLPs pay distributions, while corporations make dividend payments.
- MLPs send investors a Schedule K-1 to file taxes, while corporations send a Form 1099-DIV for tax purposes.
Most MLPs distribute a significant percentage of their income to investors each quarter, so they are often ideal investments for people seeking to generate passive income.
Top 3 MLP stocks
Best MLP stocks
Industry consolidation has been steadily whittling down the list of MLPs. As of early 2025, there were fewer than 40 publicly traded MLPs. Most of the biggest MLPs are in the oil and gas midstream (i.e., pipeline) sector. Here's a look at the best MLP investments:
| Name and ticker | Market cap | Dividend yield |
|---|---|---|
| Enterprise Products Partners (NYSE:EPD) | $66 billion | 7.02% |
| Energy Transfer (NYSE:ET) | $58 billion | 7.72% |
| MPLX (NYSE:MPLX) | $50 billion | 7.76% |
1. Enterprise Products Partners
Enterprise Products Partners is one of the largest publicly traded partnerships in the country. It operates a diversified and fully integrated energy midstream platform that processes, transports, stores, and exports crude oil, natural gas, natural gas liquids (NGLs), petrochemicals, and refined products.
The MLP's large-scale, diversified midstream operations generate a relatively stable cash flow. The bulk of its revenue comes from fee-based sources like long-term contracts or government-regulated rate structures, limiting its exposure to volume and commodity price risk.
Enterprise Products Partners generated enough cash to cover its distribution by a comfortable 1.7 times in 2024. It retained the rest to help finance expansion projects, maintain its strong investment-grade bond rating, and repurchase units.
The MLP has an excellent track record of distributing cash to its investors. Enterprise Products Partners has increased its distribution per unit every year for more than a quarter century.
Given its financial strength and the visible growth it has coming down the pipeline -- including $7.6 billion of approved major projects under construction as of early 2025 -- Enterprise should be able to continue paying a growing distribution to its shareholders.
2. Energy Transfer
Energy Transfer is another large-scale energy midstream company. It operates a coast-to-coast asset base with fully integrated wellhead-to-water services, enabling it to transport oil and gas from production basins to global markets.
The MLP generates a very stable cash flow. Roughly 90% of its earnings in 2025 will come from fee-based sources like long-term contracts and government-regulated rate structures.
Energy Transfer distributes about half its cash flow to investors. It retains the rest to finance its continued expansion and maintain its investment-grade balance sheet.
The MLP's distribution track record isn't as consistent as Enterprise Products Partners'. Energy Transfer cut its per-unit payment by 50% in 2020 to conserve cash and strengthen its balance sheet. However, after shoring up its financial position, it has been increasing its payout, which is now above the pre-COVID-19 pandemic level.
It also set a target of increasing its per-unit payment by 3% to 5% annually. Energy Transfer expects expansion projects and acquisitions to fuel distribution growth.
3. MPLX
MPLX is an MLP formed by refining company Marathon Petroleum (MPC 0.55%). It initially created the MLP to operate its logistics assets. However, MPLX has grown into a diversified, large-scale energy midstream company focused on managing logistics and storage (L&S) and gathering and processing (G&P) assets.
The company's L&S assets generate a very steady cash flow backed by long-term contracts with companies like Marathon. Meanwhile, the G&P assets produce relatively stable fee-based cash flow as volumes flow through its network of gathering pipelines and processing plants.
MPLX distributes a relatively conservative portion of its steady cash flow to investors (it covered its distribution payment by 1.5 times in 2024). That healthy coverage level enables it to retain cash to fund expansion projects, maintain a strong balance sheet, and opportunistically repurchase units.
MPLX had several expansion projects underway to drive growth. A big focus has been expanding its Permian-to-Gulf Coast value chain. The company is investing in long-haul pipelines to transport natural gas and natural gas liquids (NGLs) from the Permian to export infrastructure along the Gulf Coast. The projects should increase the MLP's cash flow.
The MLP's growing cash flow has supported a steadily rising distribution. MPLX has increased its distribution per unit every year since its formation in 2012 and has grown its payout at a more than 10% compound annual rate since 2021.
Pros and cons
Pros and cons of investing in MLPs
Investing in MLPs has its share of benefits and drawbacks. Some pros of investing in MLPs include the following:
- MLPs offer high cash returns in the form of quarterly distribution payments, making them attractive income investments.
- As pass-through entities, MLPs provide several tax advantages. A portion of its distributions is treated as a return on capital and remains tax-deferred until the unitholder sells. The taxes on a sale are subject to capital gains taxes.
- MLPs also offer estate planning benefits. If they gift MLP units, unitholders can transfer them to beneficiaries tax-free with no step-up basis. Meanwhile, if a unitholder dies, they can pass their units to their heirs tax-free.
MLPs also have some cons, including:
- MLPs can complicate an investor's taxes. They send a Schedule K-1 form (usually later in the tax-filing season) that can create extra work when filing taxes.
- Because MLPs are already tax-advantaged, investors cannot own them in most tax-deferred (or tax-free) accounts, such as traditional IRAs or Roth IRAs.
- MLPs have limited capital appreciation potential. Investors earn most of the returns from cash distributions instead of unit price appreciation.
Related investing topics
Should I invest?
Should you invest in master limited partnerships?
MLPs provide investors with the tax advantages of a partnership and the liquidity of a publicly traded company. These pass-through entities typically distribute a significant percentage of their income to investors, making them ideal investments for those seeking to collect passive income.
However, MLPs have drawbacks. They can complicate an investor's taxes, aren't allowed in tax-advantaged accounts, and offer only minimal capital appreciation potential. Investors need to be sure they understand MLPs before they add any to their portfolios.
FAQ
FAQ about master limited partnership (MLP) stocks
What is a master limited partnership?
A master limited partnership (MLP) is a publicly traded partnership for tax purposes.
What is an example of an MLP?
Enterprise Products Partners is an MLP. The energy midstream company is one of the country's largest publicly traded MLPs.
What is the key difference between a limited partnership (LP) and a master limited partnership (MLP)?
MLPs are a type of LP. The key difference is that an MLP is a publicly traded company, while other LPs are private business partnerships.
