Charles Mizrahi’s Checks – Income streams with master limited partnerships
Investors are forced to seek out reliable income from their portfolios due to low interest rates. One creative solution that Charles Mizrahi has popularized is investing in Master Limited Partnerships (MLPs). Mizrahi’s “MLP checks” strategy uses these unique investments to provide investors with regular cash distributions. The key characteristics of MLPs include:
- They trade on public exchanges like stocks but are structured as limited partnerships.
- They pass through income and deductions to unit holders, avoiding double taxation.
- They require investors to receive K-1 tax forms instead of 1099 forms.
- Most MLPs operate in the energy infrastructure sector such as pipelines.
Investments in capital-intensive energy projects are encouraged by MLPs. Dividends provide tax advantages and are consistent. Most MLPs trade at high yields above 5% due to their structure. There are several compelling reasons why investors like Charles Mizrahi in-depth look at mlp checks in their portfolios:
- High Yields: MLPs pay out most of their cash flow as distributions. Yields typically range from 5-10%.
- Tax Advantages: MLPs avoid taxation at the entity level. Income is only taxed when distributions are received.
- Essential Assets: Most MLPs operate necessary infrastructure assets with consistent revenues.
- Low Volatility: MLP prices tend to be less volatile than other equities due to predictable revenues.
- Inflation Hedge: MLP revenues and distributions tend to increase along with inflation.
- Diversification: MLPs have a low correlation to stocks and bonds, providing portfolio diversification.
The structure of MLPs is different than traditional publicly traded companies. Instead of shareholders, MLPs have partners known as “unit holders”. These unit holders receive quarterly required distributions in proportion to their ownership stake in the MLP. Cash flow generated from these assets is only lightly taxed at the entity level. Instead, unit holders pay the majority of taxes based on the distributions received. It means unit holders enjoy higher dividend equivalent distributions. MLP distributions are categorized into return of capital, capital gains, and income – each with different tax implications. MLPs require unit holders to receive K-1 tax forms each year to account for their portion of income, gains, losses, and credits. While K-1 forms require more work at tax time, the tax-deferred income provided by MLPs makes them very advantageous overall.
Charles Mizrahi refers to the consistent quarterly distributions provided by MLPs as “MLP checks”. By reinvesting distributions and compounding returns, MLPs create an ever-increasing “lifetime income”. There are over 100 publicly traded MLPs to choose from, mostly in the energy sector. Mizrahi suggests focusing on MLPs with essential infrastructure assets, strong track records, and established investment-grade credit ratings. Some of his favorite types include:
- Pipeline MLPs: Transport oil, natural gas, and refined products.
- Storage MLPs: Own storage tanks, terminals, and underground caverns.
- Processing MLPs: Filter or process natural gas and natural gas liquids.
- Transportation MLPs: Own marine shipping tankers, rail cars, and storage facilities.
By investing in a basket of 8-12 MLPs across these subsectors, portfolios are diversified. The key is staggering investment dates to collect distributions each month. Mizrahi calls this strategy “distribution dollar cost averaging”. With a $500,000 portfolio evenly divided into 12 MLPs, an investor could generate over $25,000 in annual distributions. Reinvesting these amounts leads to exponential growth over time. After 25 years, the portfolio could grow to over $3.25 million while providing increasing “MLP checks”.