Energy prices are surging, and income-oriented investing strategies are favored by legendary investor Bill Gross. Earlier this month, the former Pimco investment chief and “Bond King” said on social media platform Achieved double-digit growth for 12 months. As energy prices rise, action from multiple partners is getting some help. West Texas Intermediate crude futures are up nearly 20% in 2024 and Brent crude futures are up 16% as conflicts in the Middle East escalate and oil cartel OPEC+ cuts production. MLPs offer investors a way to bet on the exploration, transportation and processing of oil and natural gas. They also pay attractive dividend yields: Plains All American Pipeline and NuStar Energy, which Gross highlighted in his post, have dividend yields of 6.8% and 7.1%, respectively. While oil is a hot market right now, natural gas could be the next corner of the energy universe for investors interested in pipelines, said Stephen Ellis, energy and utilities strategist at Morningstar. Natural gas futures have fallen 26% in 2024, but stocks in the space have better growth prospects. “I have been looking at natural gas rather than oil because I think the prospects are more attractive than oil, especially for midstream,” he said, noting that there is demand for natural gas liquids exports from Asia. Midstream refers to the stage in the energy production process between upstream exploration and production and downstream refining and marketing, and usually refers to pipeline owners. Ellis particularly likes Energy Transfer, Enterprise Products Partners and Targa Resources. Energy Transfer and Enterprise Products Partners are partnerships with yields of 8% and 7.1%, respectively. Natural gas distributor Targa is a C corporation with a 1.8% yield. This strategist is doing well on these names: 17 of the 18 analysts covering Energy Transfer rate it a Buy or Strong Buy, with consensus price targets indicating upside from current levels, according to LSEG About 16%. Analysts give Enterprise Products and Targa buy ratings based on Wall Street consensus, with price targets implying upside of 12% and about 3%, respectively, according to LSEG. Business Structure and Tax Benefits Master Limited Partnerships trade on exchanges just like shares of a C corporation, but there is one key difference in the way they are structured—and this is the secret to the high yields of MLPs. The general partner is responsible for the day-to-day operations of the MLP, while investors (called limited partners) purchase interests and provide capital to the partnership. In turn, the MLP distributes income to investors. Although a partnership is not subject to federal income taxes, limited partners are taxed on the income they receive. In sharp contrast to C corporations, C corporations are required to pay corporate income taxes and pay dividends to shareholders. Because multi-tier partnerships avoid this “double taxation,” they can offer attractive benefits. See below for a list of some of the major limited partnerships. Beware of Tax Pitfalls There is a trade-off with income, though: tax complexity. Each year, the partnership issues a K-1 form to investors detailing the share of income they receive. The problem is, partners may not get the form until mid-March or later, and they need it to file their own personal returns. This means that MLP investors may find themselves with an extension to file their returns: in which case they can file their returns as late as October 15th. Remember, a filing extension does not equal a payment extension: You will still need to pay the IRS what you owe by April 15. Another consideration for investors is where they choose to hold their MLPs. Even if your tax filing is a little more complicated, you’ll want to keep your MLP in a taxable account. That’s because if you keep it in a tax-deferred account, such as an IRA, it could trigger a tax liability, known as unrelated business taxable income. This may mean that your IRA must file its own tax return.
