Master Limited Partnerships
Master limited partnerships (MLPs) can offer the investor an attractive income stream plus tax benefits. Tax on 80% of distributed income is deferred (until partnership shares are sold); the investor pays ordinary income taxes on the remaining income. Each year, partnership investors must fill out Form 1065 (Schedule K-1) to declare partnership income. MLPs pay out 5–6% a year and are projected to also enjoy 5–6% annual appreciation (source: Morningstar). The majority of MLPs have even increased their distributions by ~ 5% a year over the past 20+ years. The Alerian MLP Index is considered the benchmark for MLPs. Over the past 10 years (2002–2011), the index had an annualized return of 16.7%, about twice that of the S&P 500.
MLPs that produce oil and gas are sensitive to commodity prices, as opposed to pipeline operators who get paid no matter what oil and gas is selling for. Popular pipeline operators include Energy Transfer Partners, Atlas Pipeline Partners, Genesis Energy, Magellan Midstream Partners, Western Gas Partners, and Kinder Morgan Energy Partners (the largest publicly traded MLP).