Updated on January 1st, 2018
Master limited partnerships – or MLPs, for short – are some of the most misunderstood investment vehicles in the public markets.
They are also some of the most tax-advantageous. By avoiding taxation at the organizational level, MLPs present a tax-efficient way to generate meaningful amounts of passive income.
So how can you find publicly-traded MLPs suitable for investment? Using the MLP Excel Spreadsheet available for download below is a great place to start:
The downloadable MLP Excel Spreadsheet above contains the following for each stock in the index:
- Market Cap
- Dividend Yield
- 3-Year Beta
How to Use the MLP Excel Spreadsheet To Find High-Quality Investments
To invest in great businesses, you have to find them first.
The MLP Excel Spreadsheet contains many high-quality master limited partnerships, but not all of the partnerships included in the Excel document make attractive investments at any given time.
And therein lies the power of having a sortable Excel document – you can filter for metrics that matter, such as dividend yield.
For those unfamiliar with Microsoft Excel, here’s how to sort for the MLPs with attractive dividend yields using the MLP Excel Spreadsheet included in this article.
Step 1: Download the MLP Excel Spreadsheet at the link included earlier in this article.
Step 2: Click on the filter icon of the Dividend Yield column in the MLP Excel Spreadsheet (shown below).
Step 3: Here, we will sort for dividend yields between 5% and 10%. While not always the case, dividend yields above 10% are often unsustainable and may lead to dividend cuts.
To sort for MLPs with dividend yields between 5% and 10%, use the ‘Greater Than or Equal To’ and ‘Less Than or Equal To’ functions of the filter window. In addition, click on ‘Descending’ at the top of the window to list the MLPs with the highest dividend yields at the top of the article.
These steps are shown below.
Knowing how to find high-quality MLPs is most powerful when you understand the benefits associated with owning these investment vehicles.
The next section will discuss the benefits of investing in MLPs in detail.
Why Invest in MLPs?
There are three major advantages associated with investing in master limited partnerships:
- High dividend yields
- Tax-Advantaged Distributions
Each will be discussed in turn below.
The most outstanding characteristic of master limited partnerships is their exceptionally high dividend yield.
Case-in-point: the average dividend yield in the MLP Excel Spreadsheet is 8.9% at the time of this writing. The S&P 500’s average dividend yield is about 1.9%.
Putting these together, we note that the average MLP’s dividend yield is more than four time as high as the average dividend yield in the S&P 500. This makes MLPs ideal for retirees and other investors seeking to generate current portfolio income.
The high dividend yields of master limited partnerships is a large reason why these entities have outperformed other asset classes in recent history.
The performance of energy MLPs is compared to the other major asset classes in the following diagram.
The second benefit to owning MLPs is the additional diversification that these securities provide.
MLPs tend to have a relatively low correlation to other asset classes, which means that allocating some money to MLPs can help to stabilize the price levels of an investment portfolio.
The correlation of MLPs to other asset classes is shown below.
Looking at the data above, MLPs have the lowest correlations with bonds – particularly Treasury bonds.
This makes sense. Bonds and MLPs have very different risk-reward profiles. Bonds are low risk and low reward, while MLPs provide much higher yields in exchange for the assumption of additional incremental risk.
However, MLPs may not provide diversification against all other asset classes.
This is because MLPs traditionally operate in the energy sector. While this may provide additional exposure to new industries for investors concentrated in sectors like consumer staples or healthcare, it does not help investors that are already heavily concentrated in the energy industry.
Whether you own 50% energy common shares or 25% energy common shares and 25% energy MLPs, your portfolio will still perform poorly when oil prices experience a meaningful decline.
The last (and most important) characteristic of master limited partnerships is the remarkably favorable tax treatment of their distribution payments.
Master limited partnerships are dramatically different than corporate common shares from a taxation perspective. Some of the most notable differences can be seen below.
Source: Master Limited Partnership Association ‘MLP 101’ Presentation, slide 42
For investors, the end result of the tax favorability of MLP distributions is this: for ever dollar of revenue, more money is paid to investors on an after-tax basis (when compared to corporations, all else being equal).
This trend is shown below.
While this is a slightly simplified example, it shows the power of legally avoiding taxation at the organizational level. Even though the tax paid on MLP distributions is higher than the tax paid on corporate dividends, more shareholder income is generated in the long run.
The MLP Spreadsheet List contains a comprehensive list of all the master limited partnerships that trade on the public markets.
You can see more high-quality dividend stocks in the following Sure Dividend databases:
- The 2017 Dividend Kings List: Dividend Stocks With 50+ Years of Rising Dividends
- The 2017 Dividend Aristocrats List: 25+ Years of Rising Dividends
- The 2017 List of All 264 Dividend Achievers
Alternatively, another great place to look for high-quality business is inside the portfolios of highly successful investors.
To that end, Sure Dividend has created the following stock databases:
- Warren Buffett’s Top 20 Stocks
- Seth Klarman’s Top 5 High Dividend Stocks
- Joel Greenblatt’s Top 20 High Dividend Stocks
- Bill Gates’ Stock Portfolio: Every Holding Analyzed
- Prem Watsa’s Dividend Stock Portfolio: Every Holding Analyzed
You might also be looking to create a highly customized dividend income stream to pay for life’s expenses.
The following two lists provide useful information on high dividend stocks and stocks that pay monthly dividends: