DALLAS, TX, June 28, 2012 /24-7PressRelease/ -- A recent hot button topic for investors is master limited partnerships (MLPs). MLPs are investment vehicles that combine the tax benefits typically associated with limited partnerships with the liquidity of a common stock. But less clear in the discussion is the type of investor best suited for MLPs and a clear understanding of what they can (and cannot) do as part of an investment portfolio.
William Riley, Chief Executive Officer and Chief Compliance Officer at Fort Worth-based Riley Wealth Management, believes the first thing that must be done when considering MLPs is for investors to understand what they are (and are not) buying. "Before you invest, make sure that an MLP is the right solution for you, Riley says. "For those investors in or nearing retirement, the key is to ensure that they are going to get enough yield out of an account to maintain their living standard. MLPs can, and I stress can, be a kind of a bond substitute - although they are not bonds. MLPs can in some ways, however, behave like a bond when implemented correctly."
According to Riley, one of the most common misconceptions about MLPs is that they are like investing in commodities and, as such, are accompanied by all of the potential investing downside associated with investing in commodities. "You are not investing in the commodity," Riley explains. "The most recent sense of public consternation has come from discussion of the Keystone Pipeline - which will be an MLP. The thing to keep in mind is that the price of crude oil has little bearing on these MLPs because MLPs are really very similar to a toll road - they get paid to move material with little connection to the cost of the material being moved."
For Riley, there are two main reasons investors should consider MLPs. First, Riley uses them in a portfolio to create yield better than what is currently available. "The second part of the equation is that MLPs are an asset class that is not tied to the inevitable ups and downs of the S&P 500," says Riley. According to Riley, this is an important feature of MLPs in that they can provide stable incomes for investors. "It's a strategy that can help investors get into the commodities market in a way, while also mitigating the risks associated with investing in that market. In today's volatile stock market and low interest rate environment, MLPs - when part of a well diversified portfolio - can provide a stabilizing element that allows the investor to rest better at night knowing that their financial plans are more likely still on track."