A common misconception about midstream investing is that MLP distributions are no different than corporate dividends; however, this is a myth that is easily debunked.
Only 21.2% of advisors are allocating to midstream because of the tax advantages, suggesting that the highly attractive MLP distributions are not widely understood, according to “Energy Infrastructure 2022 Outlook: Inflation and Income Opportunities.” (Date: January 12, 2022. Sample size: 417 respondents, 36.2% RIAs.)
MLP dividends are called distributions because of the partnership structure. MLP distributions are not guaranteed and vary between MLPs — the partnership agreements of individual MLPs determine the level of distributions.
MLPs are pass-through entities and do not pay taxes at the company level. This has historically allowed MLPs to pay out more of their cash flows to investors as distributions, according to Alerian.
Most of these distributions are considered a tax-deferred return of capital, which means that taxes are not paid on that portion of the distribution until the investor sells their position. MLPs not only provide generous income, but also tax-advantaged income.
Due to the tax efficiency of the structure, MLPs have a lower cost of capital as compared to traditional C-corporations.
MLPs do not have the double taxation associated with corporate dividends and have historically provided attractive income that is largely a tax-deferred return of capital, according to Alerian.
Another common myth is that midstream investing is not compatible with ESG investing, which is an outdated and incorrect misconception of the midstream energy infrastructure industry.
Midstream companies are already blending renewable fuels, purchasing renewable power, and reducing emissions. Additionally, midstream helps facilitate the consumption of natural gas and natural gas liquids like propane and butane domestically and overseas through exports, which is helping replace dirtier fuels such as coal or wood, according to Alerian.
By some metrics, pipelines may be the cleanest and safest way to move vast amounts of energy, as opposed to more carbon-emissive methods like rail and truck.
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