Soaring oil prices are helping master limited partnerships (MLPs) and the related exchange traded funds, such as the ALPS Alerian MLP ETF (AMLP ), achieve impressive 2021 showings.
AMLP, the largest dedicated MLP ETF, is higher by 39.36% year-to-date. That’s clearly an eye-catching showing, but some investors might argue that the fund’s dividend yield of 7.72% is equally as compelling, particularly at a time of rock-bottom interest rates.
Often embraced for lofty levels of income, MLPs, including AMLP components, offer other benefits. Classified as pass-through securities, MLPs don’t pay taxes at the company. This means that if corporate taxes are raised, MLPs would have tax advantages over other asset classes. That pass-through status is also attractive in inflationary climates, such as the one investors are contending with today.
“One potential solution to consider is pass-through securities, which offer investors access to groups of specialized assets that are traded on the public market and are corporate tax-exempt,” reports BenefitsPro.
MLPs are publicly traded partnerships known for a “pass-through” feature that helps investors generate stable, predictable cash flows. Investors are required to pay income taxes in states where the MLP operates and report taxes on the K-1 form.
MLPs also offer another perk: tax-deferred income. The bulk (or, in some cases, all) of the dividends distributed by MLPs are classified as a tax-deferred return of income.
“Because these securities are not taxed, nearly all their earnings must be paid out to investors, which is why they are called ‘pass-through’ securities. Earnings are passed on to investors without taxation to avoid being taxed twice. This mechanism allows investors to benefit from income streams that may be higher than if they were subject to taxes,” according to BenefitsPro.
The good news proposition with AMLP doesn’t end with tax benefits. Importantly, there’s support for the fund’s impressive yield because MLPs, remembering their own recent history of profligate spending, are reining in capital expenditures and focusing on balance sheet strength. That renewed focus on sound fundamentals is a signal to investors that MLPs are prioritizing credit worthiness and payout sustainability and growth — vital traits for investors who want high levels of income without having to take on excessive risk to attain it.
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