Energy prices are surging, and an income-oriented play is getting some love from legendary investor Bill Gross. Earlier this month, the former Pimco investment chief and ” bond king ” said on social media platform X : “I love MLP pipelines. … Better than AI,” noting that these master limited partnerships have climbed by double-digits in the past 12 months. The action in MLPs is getting some help as energy prices jump. West Texas Intermediate crude futures have popped nearly 20% in 2024, and Brent futures have surged 16% as conflict in the Middle East escalates and oil cartel OPEC+ cuts production. MLPs offer investors a way to bet on the exploration, transport and processing of oil and gas. They also pay attractive dividend yields: Plains All American Pipeline and NuStar Energy , both of which Gross highlighted in his post, have dividend yields of 6.8% and 7.1%, respectively. Even as oil is a hot market now, natural gas could be the next corner of the energy patch for investors interested in pipelines, according to Stephen Ellis, an energy and utilities strategist with Morningstar. Natural gas futures have tumbled 26% in 2024, but plays in that space have better growth prospects. “I’ve been focusing on gas over oil because I think the outlook is more attractive versus oil, for midstream in particular,” he said, noting that there is demand in Asia for natural gas liquid exports. Midstream refers to the stages of the energy production process between upstream exploration and production and downstream refining and marketing and often refers to pipeline owners. Ellis likes Energy Transfer , Enterprise Products Partners and Targa Resources , in particular. Energy Transfer and Enterprise Products Partners are partnerships, and they yield 8% and 7.1%, respectively. Gas distributor Targa is a C corporation and has a yield of 1.8%. The strategist is in good company on these names: Of the 18 analysts covering Energy Transfer, 17 rate it a buy or strong buy and consensus price targets suggest about 16% upside from current levels, according to LSEG. Enterprise Products and Targa are both buy-rated by analysts based on the Wall Street consensus, with price targets implying upside of 12% and roughly 3%, respectively, according to LSEG. Business structures versus tax benefits Master limited partnerships trade on exchanges just like the stocks of C corporations, but there is a key difference in how they are structured – and that is the secret behind MLPs’ hot yields. General partners run the MLP’s day-to-day business, while investors – known as limited partners – purchase interests and provide the partnership with capital. In turn, the MLP spins out income distributions to the investors. Though the partnership isn’t subject to federal income tax, the limited partners face taxes on the income they collect. Contrast that with C corps, which are subject to corporate income taxes and pay dividends that are taxable to the shareholders. Because MLPs avoid this “double taxation,” they can offer tempting yields. See below for a list of some master limited partnerships. Watch for tax traps There’s a trade-off for the income, though: tax complexity. Partnerships issue their investors a Schedule K-1 every year, detailing their share of income received. The issue is that partners may not get this form until mid-March, or later – and they need it to file their own individual tax returns. That means MLP investors could find themselves going on extension to file returns: In that case, they could file their returns as late as Oct. 15. Bear in mind that an extension to file isn’t an extension to pay: You’ll still need to pay the IRS what you owe by April 15. Another consideration for investors is where they choose to hold the MLP. Even if your tax reporting is a little more complicated, you’ll want to keep the MLP in a taxable account. That’s because if you hold it in a tax-deferred account, like an individual retirement account, you could trigger a tax liability, known as unrelated business taxable income. This may mean your IRA will have to file its own tax return.
Bill Gross says this income play is ‘Better than AI.’ How you can get in on it
