Hunt for Yield Leads to MLPs

NEW YORK ( TheStreet) -- ETF investors' search for yield has led them to Master Limited Partnership (MLP) funds over the past year, due to relatively high yields. MLPs in these funds are typically involved in the production, transportation and storage of natural resources such as natural gas. For instance the MLP, Kinder Morgan Energy Partners ( KMP), owns or operates oil and natural gas pipelines as well as power plants and storage facilities.

One of the major benefits of owning MLPs is their large distributions. KMP pays out to investors on a quarterly basis. Over the past year, the fund's distribution has been approximately 7%.

There is one important element to consider, however, before adding an MLP to your portfolio. Because they are set up as partnerships, investors holding MLPs are taxed differently than investors holding traditional securities. MLPs are not taxed at the company level. Rather, tax liability generated from the partnership's gains and losses are passed on through to the shareholder. At tax time, an investor holding a company such as KMP will be presented with a K-1 form rather than a 1099.

This added complexity at tax time may be enough to dissuade investors from taking advantage of the income benefits of MLPs.

However, thanks to the introduction of exchange traded products, investors now have the opportunity to invest in baskets of popular MLPs while avoiding the headaches that can come with filing a K-1. In the past, I have promoted the JPMorgan Alerian MLP Index ETN ( AMJ) as an effective, income yielding alternative to the United States Natural Gas Fund ( UNG). AMJ is set up as an ETN, meaning that investors holding this fund do not actually hold shares in the individual partnerships. Rather, they hold a senior debt note issued by JPMorgan ( JPM).

Over the past year, AMJ has paid investors a comfortable 6% dividend which is reported on a 1099 form.

AMJ tracks the Alerian MLP Index. This index is made up of 50 individual holdings hailing from the petroleum transportation, gathering and processing, natural gas pipeline, propane and exploration and production industries. Top positions include Enterprise Products Partners ( EPD) and KMP. These two positions account for approximately 14% and 12% of the fund's total assets respectively.

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