What are MLPs?
Master Limited Partnerships are publicly-listed limited partnerships that trade on a securities exchange and are primarily focused on natural resource-related activities, including oil, gas, coal, timber, and commodity transportation. An MLP is comprised of two types of partners:
- General partners who manage an MLP's day-to-day operations and administration.
- Limited partners (investors) who provide capital to the MLP by purchasing units (or shares) in the partnership, entitling them to periodic income distributions from the entity's operations.
Benefits and drawbacks of MLPs
Master Limited Partnerships can offer investors high yields compared to common stock and other investment products, but they also come with greater risk and complexity.
Benefits of MLPs
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. Investors relying on MLP income payments should be aware that forecasted distributions can fluctuate or be reduced.
Liquidity
Most MLPs are listed on national exchanges and are therefore typically more liquid than traditional partnerships.
Drawbacks of MLPs
Complex tax consequences
MLPs must meet certain criteria, including earning at least 90% of their 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 and legislation risk
The high yields associated with MLP investments make them sensitive to changes to interest rates as well as legislative changes to tax codes which could affect an MLP's pass-through tax structure.
Volatility
MLPs have historically experienced higher volatility than stocks and bonds.
Schwab's perspective on MLPs
We encourage investors considering MLPs to approach them as part of the equities allocation of their overall portfolio. While MLPs have historically had periods of strong returns, they have also experienced high levels of volatility.
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 specific commodity or other resource.
How do I invest in MLPs at Schwab?
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. Remember, different asset classes can fill multiple roles in a portfolio. Carefully consider how MLPs can fit into your asset allocation model.