MLPs: Play Oil Tycoons for Income

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"Investors are pouring into energy-related MLPs."

Chuck Moore, a retired college professor and real-estate investor in Nevada, started buying into oil and gas pipeline partnerships last year after fleeing stocks and searching for yield.

Master limited partnerships (MLPs), typically are organized around energy and natural resources. They invest in assets ranging from pipelines to commodity-transporting ships and are traded on major exchanges. Kinder Morgan Energy Partners LP is yielding 6.21% and its unit price, similar to a share price, has jumped 13% this year.

Investors are pouring into energy-related MLPs, increasing their market capitalization 20% as of July to $183 billion from $152B in 2009, according to Michael Blum, a managing director at Wells Fargo Securities. Last year, about 90% of new equity in the partnerships came from retail investors, he said.

The yields, quarterly distributions, which are similar to stock dividends, and tax-deferrals on most of the income received make them attractive to wealthy investors.

"I see them spreading across people's tax returns like wildfire," said Bill Fleming, a managing director in at PricewaterhouseCoopers LLP.

Moore, the investor, said he worries the government might take away the tax advantages of MLPs to raise revenue.

"The real big caveat and the reason I've lightened up is the federal government is broke," said Moore, who had invested about $2 million.

Investors receive a K-1 tax form each year and must declare their MLP earnings and deductions, said Fleming of PWC, whose average client has investable assets of $4M$20M.

"As long as people keep using electricity, driving their cars and heating their homes, there is going to be a need for gas and oil pipelines," said Moore.

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