MLP ETFs in Focus on Yield, Taxes and Dividends

Exchange traded funds and notes tracking master limited partnerships have fallen sharply in November amid fears over the U.S. fiscal cliff. However, MLP ETFs could still be attractive to income-oriented investors searching for yield.

Also, most of the income produced by MLPs is not in the form of “qualified” dividends. Therefore, they would not be affected by potential higher tax rates on dividends.

“Two key groups of high-yielding equities, master limited partnerships and real estate investment trusts, were never eligible for the 15% federal tax rate in the first place, so the current treatment of these income streams isn’t at risk,” says Josh Peters, editor of Morningstar’s Dividend Investor newsletter.

President Barack Obama’s re-election and the looming fiscal cliff have many predicting that the tax breaks on stock dividends and capital gains won’t be renewed at the end of 2012. If the tax cuts expire, the rate on qualified dividends could rise from 15% to as high as 39.6% for top earners.

MLPs are companies involved with the storage and transportation of commodities such as oil or natural gas. They are known for their high dividends and diversification benefits, although the asset class and related ETFs have unique tax wrinkles.