NEW YORK (BestCredit) -- One area of the market that is often overlooked is the master limited partnership, or MLP, which derives the majority of its cash flow from commodities, natural resources and real estate businesses. An MLP is essentially a publicly traded limited partnership that can offer investors special tax benefits as part of a retirement portfolio.
In most cases, MLPs will have a distributable cash flow that is much larger than its taxable income, so investors are able to capture cash payments that are higher than the total taxed amount. This creates a tax deferral scenario that is highly efficient, combined with exposure to industry sectors that are currently showing strong and stable upside momentum.
For those who are interested in dividend stocks and fixed income instruments, MLPs offer an attractive alternative, as their total returns typically outpace these more commonly watched investment avenues. Over the last five years, the S&P MLP Index (SPMLP) has posted annual returns of nearly 30%. This is well above the performance of the broader S&P 500 (^GSPC) during the same period, and there is good reason to believe the same trends will continue going forward.
Payouts in MLPs are usually raised over time, so there is less cause for concern when interest rates start to rise. Yield-backed instruments are particularly vulnerable if the Federal Reserve enters into the tightening portion of its rate cycle, and it is looking increasingly likely that this could begin in the next few quarters. Recent comments from St. Louis Fed President James Bullard suggest that the first rate hike could come as soon at Q1 2015, so it is important for investors to start positioning for these changes ahead of time.
One name to watch is the C-Tracks Exchange-Traded Notes (MLPC), which was launched last year by Citigroup and closely tracks the performance of the Miller/Howard MLP Fundamental Index.
In MLPC, investors gain exposure to master limited partnerships in the energy sector, which should continue to be supported by rising international demand for exports. This means greater need for drilling, storage, and transportation facilities that should keep these companies viable for the very long term.
The energy sector should also benefit from probable decisions by Congress to approve roughly 25 gas export applications that will be used to expedite product deliveries to countries with supply deficiencies.
MLPC charges an annual expense ratio of 0.95%, comes with a 4.9% payout yield, and has achieved gains of nearly 9% year to date. But when we consider the outlook for the sector as a whole, market valuations for MLPC still look relatively low.