MLP (Part II)

By Ahmad Hassam

As said, this has to be done on a quarterly basis. The reason MLPs exist is to distribute all available cash back to the MLP unit holders. The following factors are considered before determining the amount of cash distributed to each individual investor:

1) How many units you hold as an MLP investor. 2) The incentive distribution rights created for the GP. 3) The difference between the total cash flow and the cash flow ploughed back into the MLP for futures growth.

So once you decide to invest in commodities, you have many investment options like mutual funds, stocks, ETFs as well as MLPs. You must do your due diligence while making your investment decisions. There are always pros and cons of each investment vehicle!

Investing in MLPs is quite simple. Since an MLP is a publicly traded entity. You can simply invest in an MLP by calling your broker and telling him or her how many units of a particular MLP you are interested in buying. So investing in an MLP is just like investing in stocks.

There are not many MLPs registered in US. Something like 50 MLPs is being publicly traded in the United States. Out of these 50, 40 are energy MLPs meaning that they are involved in the storage terminals, pipelines, transportation, refining and distribution. Majority of MLPs trade on NYSE with a few trading on NASDAQ and AMEX! So you don't have to do your research from a long list of MLPs. MLP sector is growing.

You only need to remember this 90% of the income that comes to an MLP should come from the production and distribution of commodities for these MLPs to have the tax exempt status. Moreover, investing in pipelines and other energy infrastructure offers steady cash flow streams for an MLP.

So when you invest in an MLP, you should look for answers to the following questions: 1) What's the historical payout of the MLP? 2) How much is the cash flow? And so on. If your brokerage firm has published some research on the MLPs, you can reference that.

Don't forget there is always some risk involved in any investment. The more return you demand, the more risk you will have to take. Now investing in MLPs do come with some risks like most of the infrastructure is like pipelines and drilling rigs that are vulnerable to natural disasters and earth quakes like the Hurricane Katrina, so any such event can have a negative impact on your investment.

Since the MLP is fairly small at this moment, there can be liquidity issues in withdrawing your investment from an MLP. These are some of the risk that you can face while investing in an MLP. There is another risk related with the management. You don't have much say in the management of the MLP. Running an MLP is basically a GP show. If you are not satisfied with the performance of the management or its policies only thing that you can do is to withdraw your investment from that MLP. - 23199

About the Author:

Mr. Ahmad Hassam is a Harvard University Graduate. Trade Dow Futures . Learn Commodity Trading !