Invest in Master Limited Partnership (MLP)

I have always wanted to build a portfolio consisting of dividend-paying stocks that could generate passive income for us in the long term. The plan is to continuously investing in stocks with high dividend yield such that distributions from the portfolio will someday make up a significant portion of our income when we can no longer count on our salaries.

As part of the plan, I started investing in dividend-paying ETFs such as PowerShare High Yield Equity Dividend Achievers Portfolio ETF (PEY) through my brokerage account at Scottrade. But that didn’t last long and I sold all my position in PEY because Scottrade didn’t allow free dividend reinvestment, which is essentially all I want to have at this stage. I mean, right now I don’t’ want to collect distributions as cash. I would rather have them reinvested so I can continuously add shares. Of course, I can use the distributions to buy shares myself, but there are things I really don’t like about doing it manually. First I will have to pay $7 commission for each transaction with Scottrade, which is a significant amount considering the dividends received. Second, I can’t reinvest all the dividend payout since Socttrade doesn’t allow fractional shares either. I want dividends to be reinvested automatically, and I want it done free. I didn’t give up on dividend-paying ETFs, but I do need to find an alternative to PEY that allows me to DCA without commission. One possible candidate is Vanguard High Dividend Yield (VYM), which has to be invested directly with Vanguard to avoid trading commission.

Another element of my long-term plan is investing in high dividend yield stocks, mostly purchased through Direct Stock Purchase Plan (DSPP) through ComputerShare (see my post on how to buy stocks from ComptuerShare). Since early 2006, I have bought dividend-paying stocks including Bank of America (BAC), Procter & Gamble (PG), ExxonMobile (XOM), Boston Properties (BXP), Progress Energy (PGN), and my latest addition Union Pacific (UNP) through ComputerShare and have been DCA every month since the initial purchase. ComputerShare offers lot of stocks, either through DSPP or DRIP (Dividend Reinvestment Plan), but I only buy those without dividend reinvestment fee to lower the overall investment costs. Except BAC, which now pays a symbolic 1 cent per share quarterly dividend, all other stocks work out pretty well for me so far.


As I look for more options to add to my investments recently, I started to consider whether to add Master Limited Partnerships (MLP), which primarily focus on oil and natural gas pipelines and are known for paying handsome dividends to investors. However, due to the complicated tax issues involved in investing directly with MLPs (K-1 tax reporting), I am thinking of using MLP mutual funds or ETFs instead because they not only reduce the burden at tax filing time (getting 1099 forms instead), but also provide diversities (within the MLP sector of course), even though that means giving up some tax benefits of investing in MLPs directly.

MLP Mutual Funds

The first MLP mutual fund was launched two years ago by SteelPath and the firm currently manages a few funds specializing in MLPs, including SteelPath MLP Alpha Fund, SteelPath MLP Income Fund and SteelPath MLP Select 40 Fund. However, when I looked at these funds, I was immediately turned off because not only they all charge front loads, but also have a rather high expense ratio at 1.50%. I have never bought any fund with load before and I won’t this time, even though the funds have quite nice yields.

MLP Closed-End Funds

Closed-end funds (CEFs) are more like ETFs than traditional mutual funds in terms of how you can buy and sell them because they are traded just like stocks. There are two closed-end MLP funds on my radar. One is Tortoise MLP Fund (NTG) and the other is Cushing MLP Total Return Fund (SRV). Between the two, I like SRV better because of it has better dividend yield currently at about 9% with an expense ratio of 3.39%, which is higher than that of NTG at 1.39%. But SRV is currently selling at 25% higher than its actually NAV, making me think twice about it.

MLP Exchange-Traded Funds and Notes

Finally, there are also a few options in ETFs. ALPS Alerian MLP ETF (AMLP) is the first MLP ETF launched in August 2010. The fund current has a 12-month yield of 5.9% with an expense ratio at 0.85%. Yorkville High Income MLP ETF (YMLP) is the newest member in the MLP ETF category with an expense rate at 0.82%.

The JP Morgan Alerian MLP Index ETN (AMJ) is by far the largest MLP Exchange-Trade Notes (ETNs) out there, which is also the most heavily traded ETN. AMJ has a 12-month yield of 4.7% to go with an ER of 0.85%. Other MLP ETNs include Credit Suisse Cushing 30 MLP Index ETN (MPLN) and UBS E-TRACS Alerian MLP Infrastructure ETN (MLPI).

Looking at the above options in investing in MLPs, I haven’t decided which one to use eventually, but my focus has narrowed down to between SRV and AMLP. Both can be bought and sold at any time as they are exchange-traded. I like SRV’s yield, but it’s selling at a hefty premium. As for where to buy, I will probably use TradeKing instead of Scottrade because TradeKing allows free dividend reinvestment.

Photo credit: Travis S.

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