Defining Master Limited Partnerships - dummies

Defining Master Limited Partnerships

By Lawrence Carrel

At one time, real estate investment trusts, or REITs, held the majority of high yielding stocks, but the bursting of the housing bubble ended that run. For income investors, MLPs are the new REITs.

Not all companies can claim MLP status. To qualify, a company must receive at least 90 percent of its income from interest, dividends, real estate rents, gain from the sale or disposition of real property, income and gain from commodities or commodity futures, and income and gain from activities related to minerals or natural resources. A huge majority of MLPs are in the energy industry, but energy MLPs aren’t tied so much to the price of oil and gas like other energy stocks can be. MLP companies are typically more involved in the extraction, transportation, and storage of oil and gas, so they’re less affected by fluctuations in the price of crude oil.

Although MLPs are partnerships, they aren’t like energy partnerships of the 1970s and 1980s that were sold as tax shelters and many of which were scams. MLPs are legitimate vehicles that offer real tax savings.