In office barely more than three months, President Biden is busying pitching various plans and proposals, including the largest tax increase the U.S. has seen in three decades.
In fairness, the increase, which includes significant alterations to the capital gains structure, is targeted at big earners and high net worth individuals and married couples. It remains to be seen if it passes and in what form, but mere speculation that taxes could rise has some investors looking for tax-deferred income.
Master limited partnerships (MLPs) and the ALPS Alerian MLP ETF (NYSEArca: AMLP) are assets that can help in that quest.
“For tax-deferred income, Master Limited Partnerships (MLPs) may represent an attractive option for investors,” writes Alerian analyst Stacey Morris. “Typically 70-100% of MLP dividends (called distributions) are considered to be a tax-deferred return of capital, which means the taxes on that portion of the income are not paid until the investment is sold. The portion of the distribution that is not a tax-deferred return of capital is taxed at ordinary income rates in the current year.”
Big Yield, Tax Benefits with ‘AMLP’
AMLP, the largest exchange traded fund tracking MLPs, sports a dividend yield of 10% and is up a stout 29% year-to-date, confirming its leverage to the rally in energy stocks.
The ETF seeks investment results that correspond generally to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index. The index is comprised of energy infrastructure MLPs that earn a majority of their cash flow from the transportation, storage, and processing of energy commodities.
“As pass-through entities, MLPs do not pay taxes at the company level, and an increase in the corporate tax rate would widen MLPs’ tax advantage relative to corporations,” adds Morris.
Bottom line: there’s plenty of politicking remaining on the tax front, but with energy stocks soaring and MLPs offering plenty of income, tax-deferred or not, AMLP could be an appealing strategy for investors regardless of what happens on Capitol Hill.
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
