As wealthy Americans brace to pay more taxes in 2013, I fully expect Master Limited Partnerships (MLPs) to grab the attention of wise investors. The reason is two-fold…
First, these partnerships are required by law to distribute a large majority (90%) of their income to unit-holders (just another name for “shareholders”). This gives yield-starved investors a place to turnrn in lieu of dividend-paying stocks (many of which are now overpriced because of strong demand).
But more importantly, MLPs enjoy preferential tax treatment. Much of the income investors receive is tax deferred. This allows the investor to reinvest gains, before having to pay taxes. Anyone that understands the “magic” of compounding returnrns knows this helps investors grow their account balance more quickly.
Here’s a look at the performance of two Alerian indices that track the performance of MLPs. In orange is the company’s standard MLP index (NYSE: AMLP). This tracks MLPs of all kinds. In green is the Alerian Infrastructure MLP Index (NYSE: MLPI).
Over the past two years, infrastructure-focused MLPs have fared better than average, gaining about 9% more than the broad MLP index. I think that has a lot to do with energy prices and the growing demand for infrastructure investment around the world.
Low energy prices have hurt many MLPs – especially oil and gas explorers/producers. The price of natural gas has been declining for years now, so many producers simply can’t make money selling the gas they produce. This has created a drag on many energy-related MLPs. Watch for these MLPs to recover in 2013 if geopolitical turmoil sparks higher oil and gas prices.
And I expect infrastructure-focused MLPs to continue to outperform in 2013. This sector is much less sensitive to cyclical downturnrns in the economy, as infrastructure investment acts as both a direct, immediate stimulus and a foundational investment for future growth. The world’s emerging economies will continue to invest in new infrastruture as they encourage their populations to move toward economy-driving urban areas.
For 2013, two things seem to be near certain: taxes are going up… and so will interest in tax-advantaged investment vehicles like MLPs.
If you haven’t done so already read the Survive & Prosper issue on “Why a Tax Hike on the Top 2% Will Hurt Us All.”