The Nuts and Bolts of Commodity MLP Investments

How do you go about investing in commodities through a master limited partnership (MLP)? It’s quite simple, really. Because MLPs are publicly traded, you can purchase any of them on the exchange on which it’s traded by calling your broker to purchase MLP units or by buying them through an online trading account, if you have one. Either way, buying MLP units is as simple as buying stocks.

MLP Name Investments Exchange
Kinder Morgan (KMP) Energy transportation, storage, and distribution NYSE
Enterprise Products (EPD) Oil and gas pipelines, storage and drilling platforms NYSE
Enbridge Energy (EEP) Energy pipelines NYSE
Alliance Resources (ARLP) Coal production and marketing NASDAQ

Although most MLPs in the United States trade on the NYSE, a few trade on the NASDAQ and the AMEX.

For a complete list of MLPs, check out the National Association of Publicly Traded Partnerships. Although this is a lobbying group for the industry, the site includes a complete listing of all available MLPs. You should also check whether your brokerage firm has published any research on MLPs you’re interested in.

About 50 MLPs are publicly traded in the United States; out of these, 40 are involved in the energy industry, with a focus on storage terminals, pipelines/transportation, refining, and distribution.

Remember, MLPs invest in these assets because 90 percent of their income must come from infrastructure related to the production and distribution of commodities for them to be exempt from double taxation. In addition, many MLPs invest in pipelines and other energy infrastructure because they offer steady cash flow streams, which can then be distributed back to shareholders.

Before you invest in an MLP, ask your broker the following questions:

  • What’s the historical payout?

  • How much is cash flow?

  • What are the general partner’s incentive distribution rights?

  • What are the operational activities?

  • How much assets are under management?

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