When investing in MLP's one should be aware of the MLP tax advantage and the possibility that at some point it can end
The world of Master Limited Partnerships (or MLPs) has to go through adjustments from time to time as investors sometimes wonder about their tax consequences at a time when the government is looking for new tax revenues. Fitch Ratings addressed this possibility just recently. Dividend and income investors have a lot to worry about if this effort picks up any momentum. The good news is that Fitch is not really that worried that MLPs will lose their tax advantages in the near-term and intermediate-term. The bad news is that any fears of this being challenged is likely to bring havoc to the sector and this remains a long-term threat the larger and larger this sector becomes.
MLPs have payouts rather than traditional dividend yields. They are passing on some income out that is taxed, but the tax advantage from so much of the payout comes from the fact that the lion’s share of payouts is structured as a return of capital rather than income. These payouts are to units rather than shares and they can make your taxes harder for some tax preparers as well. So with most MLPs tied to the oil business and with Washington D.C. wanting revenue from wherever it can find it, this tax-advantage situation is a constant threat to the sector. It also needs to be known that MLPs are not the big oil companies that the public generally debates about tax breaks.
For those of us who believe that MLP's can be a real source of making money one can look at the PXD/PSE merger 1yr. totals PSE up 88.67% and PXD up 93.74% both paid a dividend although PXD paid very little. This is an example of the M&A activity currently going on in this sector as smaller MLP's work to become larger.If one has a mind to they can do the research and find it for themselves. While not all will merge all are on the list of possibilities and are mentioned from time to time.
Remember your choice. Do your own DD.
I currently receive about 118k yearly in Dividends alone from all stocks either MLP's or others.