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
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.
An energy boom in the U.S. creates highly positive scenarios for MLPs as a whole, and new entrants like MLPC stand to benefit from the positive exposure that will likely be seen in coming quarters. New methods in oil shale extraction -- in areas like horizontal drilling and hydraulic fracturing -- have greatly improved efficiency and will help raise U.S. output to its highest levels in nearly 30 years in 2014. Output levels in natural gas are already at record highs, and there is nothing to suggest that these upward trends will be ending any time soon.
MLPs provide the infrastructure that is needed to distribute these materials, and MLPC is positioned to benefit from the long-term scenarios that should continue to support the sector as a whole. When we take a look at the added payout and taxation benefits that come with investments in this space, there is a strong case for additional upside even after the bullish moves seen in the early parts of this year.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.