Most stock investors are familiar with dividends. Dividends are paid to shareholders as a “thank you” for investing in the company.
MLPs, or Master Limited Partnerships, are a type of company structure that allows for shareholders to be paid in distributions rather than in dividends.
Distributions have different tax implications compared to other companies that pay dividends.
If you are holding the stock in a taxable account, distributions lower your cost basis until you reach a cost basis of zero. Your cost basis is the cost in which you bought into the shares of the company. Then when you go and sell the stock, the taxes will be higher since the cost basis had been lowered due to the distributions.
If the stock is being held in a tax deferred/preferred account, then there are separate rules as to how taxes work. Usually, a ROTH IRA is taxed preferred where money that is contributed must be taxed upfront and gains are not taxed. However, there are slight exceptions to this rule. After the point where you receive over $1000 in distributions in one year, it becomes taxable.
My Favorite MLPs?
Energy Transfer ($ET) is a MLP that pays in the form of distributions. It is a company that provides a variety of services related to energy, including transportation of natural gas and crude oil. It pays a great distribution of about 6% (as of this writing).
MLPs are a great addition to the traditional companies that pay dividends if you are looking to diversify your portfolio into different types of companies. Hopefully this helps y’all understand the difference between distributions and dividends. But until next time…
We appreciate y’all for letting us be a part of your Break Time.
*Note: I am not a financial advisor. Check with your CPA on tax implications of investing in MLPs.