Master Limited Partnerships (MLPs)

Get a better understanding of what Master Limited Partnerships are and considerations for incorporating them into your trading or investing strategy.

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What are MLPs?

Master Limited Partnerships (MLPs) are publicly listed limited partnerships that trade on a national securities exchange. Most MLPs have general partners and many limited partners (the investors). The general partners manage the MLPs' day-to-day operations, while the limited partners purchase shares in the MLP and provide capital in return for cash distributions from the entity's operations.

MLPs primarily focus on natural resource-related activities, including oil, gas, coal, timber, and certain ways of transporting commodities. While MLPs have historically paid higher distributions, investors should be aware of the complexity of the securities and the additional risks that are presented. MLPs may outperform or underperform common stock and other investment products.

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Benefits and risks of MLPs

While Master Limited Partnerships can help provide investors with higher income payments than many other investment alternatives, they also come with higher risks and more complexity.

  • Benefits

    Pass-through entity
    MLPs are considered a type of pass-through entity: a business structured so that it is not subject to corporate taxation. However, the distributions to MLP unitholders are generally subject to income taxes. A key benefit of the partnership structure is that the income distributions are not taxed twice the way the dividends of a common stock are taxed.

     

    Potential for higher yield
    MLPs tend to generate higher yields than bonds and stocks due in part to the favorable tax structure. 

     

    Liquidity
    Most MLPs are listed on national exchanges and are therefore typically more liquid than traditional partnerships.
     

  • Risks

    Complex tax consequences
    MLPs must meet certain criteria, including earning at least 90% of its income in "qualifying income." Investors are typically issued a schedule K-1 document directly from the partnership. MLPs may incur Unrelated Business Taxable Income (UBTI) that could be taxable even within an IRA. Investors should consult a qualified tax professional to learn more. 

     

    Interest rate risk
    Due to the high distribution yields, MLPs are sensitive to changes in interest rates. Rising interest rates can make MLPs less attractive relative to traditional stocks. 

     

    Volatility risk
    MLPs have historically experienced higher volatility than stocks and bonds.

     

    Legislation risk
    MLPs face a number of different legislative risks that could affect the attractiveness of the structure. These include changes to the tax code and Federal and State legislation that may affect the oil and gas industry. 
     

Schwab's MLP perspective

While MLPs have historically delivered higher total returns than stocks and bonds, they have also been much more volatile. For this reason, MLPs are not bond substitutes and should be considered part of the equities allocation of your overall portfolio, not fixed income.

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Schwab’s Perspective

Common types of MLPs

  • Pipeline MLPs

    Own and operate pipelines that transport commodities, including crude oil, natural gas, and refined products. 

  • Gathering & processing MLPs

    Gather and process natural gas to move the commodity from the well to the market.

  • Exploration & production MLPs

    Engaged in the exploration, development, and production of crude oil and natural gas. 

  • Specialty MLPs

    Focus on a specific commodity such as coal or propane or focus on seaborne transportation of the commodity.

How do I invest in MLPs?

Your approach to investing in Master Limited Partnerships depends on what type of investor you are. At Schwab, we provide the help you need to build a strong portfolio, whichever way you prefer to invest. You can buy and sell MLPs on your own with a Schwab One® brokerage account or access MLPs through one of Schwab's managed portfolio solutions.

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