Buy good businesses paying high yields as cheaply as possible: If that’s what you’re after, you’re going to find a lot to like in our new service MLP Profits.

 

Our focus is master limited partnerships, an investment class that’s been around a while but has recently gained a very new shine. At their core, MLPs are flow through entities, organized to pass a maximum amount of cash flow directly to investors. Rather than pay taxes at the corporate level, the burden is passed directly through to investors, who in turn have numerous ways of deferring those taxes, or even avoiding them entirely.

 

The result is a much higher dividend yield than corporations can pay, particularly after taxes are taken into account. And, as long as the underlying business is well suited to paying out large sums of cash, that high rate of payment can continue indefinitely. In fact, the best-run MLPs actually increase their distributions like clockwork, continuously boosting your cash flow as long as you hold them.

 

Of course, not every business is well suited to a high payout model. That’s what all too many investors found out when they snapped up the MLP initial public offerings that flooded the market in early 2007. Wall Street always produces to investor demand. And much of what came out then was basically junk, doomed to fail when conditions turned ugly.

 

If there is a silver lining to the market crackup we’ve seen since then, it’s that this junk has largely been shaken out. What’s survived has been battle tested in the worst possible environment. And any MLP that’s been able to consistently increase distributions over the past year is pure investment gold.

Best of all, investors always throw the baby out with the bathwater. While junky MLPs were going down for the count as businesses and in the market, even stronger MLPs were sold off. The result is first rate MLPs yielding 8, 9 even 10 percent are on track to increase dividends 7, 8 even 10 percent over the next 12 months.

 

That’s an extraordinary condition I’ve never seen in two plus decades in this business. And keep in mind that these MLPs have proven themselves to be hard targets. They’ve not just survived two consecutive quarters of -6 percent plus annualized declines in US GDP, they’ve actually thrived, while building for future growth.

 

That means only one thing: Massive capital gains when the economy gets back on its feet, in addition to high, secure yields.

 

MLPs are attractive for one other big reason: They’re the only real way going forward for investors to minimize investment taxes in the Obama era. For one thing, the investment tax cuts passed by the Republican Congress and the Bush Administration in 2003 are slated to sunset in 2011.

 

Unless action is taken, dividends paid on common stocks will go back to being taxed as ordinary income, and even capital gains will return to historic rates. The best we can hope for is President Obama follows through on his campaign proposal to institute a 20 percent maximum tax on dividends, which even so will be an increase on the 15 percent we pay now.

 

Municipal bonds have always been an alternative for tax avoidance. But here the situation is arguably even worse, given the growing budget deficits faced by state and local governments. If the charismatic Governor Arnold Schwarzeneggar can’t restore at least some fiscal discipline to California, for example, how can anyone expect lesser lights to make needed adjustments? That means further bailouts and heavy reliance on muni bond insurance, which has never been truly tested in a crisis—not exactly the kind of investment income seekers should depend on.

 

In contrast, the best MLPs have already been through their crucible and all publish volumes of information about their financial health, which we’ll be sorting through so you’ll know where your holdings stand. And, while their distributions won’t likely be wholly tax exempt, they’re also much higher than muni bond interest and a good chunk will be return of capital, not taxable until you sell.

 

It’s always possible Uncle Sam will pull the plug on MLPs in a vain effort to bring the government budget to balance. That’s why we always buy the business, not the tax dodge. If there is a change in tax status, even our picks will drop in value. But they’ll emerge as valuable properties once the dust clears.

 

Meanwhile, we’ll keep an eagle eye on what Congress and the Administration do, in part through the National Association of Publicly Traded Partnerships, the chief lobbying group for MLPs in Washington. Note that last year’s Democratic Congress actually passed an expansion of what constitutes an MLP. Even in the current Congress, MLPs have many allies. That makes dramatic change unlikely.

 

Two Approaches, One Goal

 

My partner Elliott Gue and I bring somewhat different areas of expertise to the table with MLPs. His is energy. In fact, he writes one of my absolute favorite advisories, The Energy Strategist. Mine for the past 23 years has been income, as readers of Utility Forecaster and Canadian Edge can attest.

 

Master limited partnerships or MLPs are one area where our interests and knowledge are perfectly aligned. For more than a decade, I’ve tracked roughly a dozen of the most conservative MLPs in Utility Forecaster, all of which have increased distributions like clockwork year after year. Elliott, meanwhile, has uncovered MLPs with robust growth in Energy Strategist.

 

This product MLP Profits unites both of those approaches to give you the highest income, biggest growth potential and most secure safety these vehicles have to offer. The rest of this website introduces each of the product’s features.

 

At the heart of every issue is our How They Rate table, with our buy/hold/sell advice on every publicly traded MLP in the US. Our top picks are highlighted in the Portfolio table, divided into “Conservative,” “Growth” and “Aggressive” picks. The underpinnings of each category are reviewed in the other articles on the home page in front of you, along with the initial portfolio picks.

 

Each week, we’ll alternate an article on each of these Portfolio groups, featuring Portfolio additions, subtractions and any other information you need to know. Next week, for example, we’ll feature the Conservative Holdings, followed by “Growth” and “Conservative.”

 

The “How To” section on the webpage features background information on MLPs, from taxes to essential terms that will be used in this issue. Note that as a rule we always strive to avoid jargon in our advisories. MLPs, however, are a little more intricate than common stocks, and it’s very important to understand what makes them different.

 

We’re confident you’ll find MLP Profits as concise and comprehensive a resource on master limited partnerships as exists today. Here’s to many happy returns! 

 

Sincerely,

 

Roger S. Conrad

 

Elliott Gue

 

Editors, MLP Profits