How is an MLP a tax shelter?

Well, the fact of the matter is that a master limited partnership doesn't have to pay any Federal income tax on its own; rather, it passes along all of the income and deductions to you, the limited partner. So, you get to take the partnership depreciation deduction just as the partnership would if it were filing the return.

As a result, a large portion of your cash payout is sheltered by this depreciation deduction. This is what you do as a limited partner; you don't get those deductions if you own shares of a corporation.

Now let's turn our attention to three masters of the MLP universe: Energy Transfer Partners (NYSE: ETP), Buckeye Partners (NYSE: BPL), and Enterprise Products Partners (NYSE: EPD). All three of these MLPs are pipelines that transport natural gas, oil and refined products. They're all very stable, high-quality utility-like businesses, and these MLPs are trading at, as I say, yields of in some cases of 7% and more.

Stock #1: Energy Transfer Partners (NYSE: ETP)

One MLP that I've been buying rather heavily for my own account in recent days is Energy Transfer Partners. ETP owns a rapidly growing natural gas pipeline network as well as one of the nation's largest propane-distribution businesses. It's currently yielding over 7% and is growing faster than the typical pipeline partnership. We could be looking at annual increases in our cash payouts over the next 3 to 5 years of around seven or eight percent. ETP offers us an inflation-beating yield up front and a promise for yield increases coming forth over the next few years. I'm also expecting well over 90% of this year's payout to be tax-deferred. Buy ETP, a member of our Incredible Dividend Machine, at $52 or less.

Stock #2: Buckeye Partners (NYSE: BPL)

Although ETP would be my number one pick, Buckeye Partners is a very conservative partnership that I've been buying for years. Buckeye Partners is a pipeline that transports refined petroleum products, including gasoline, jet fuel, diesel fuel and natural gas liquids, to name a few. I've been recommending it since 1990, so over the last eighteen years Profitable Investing subscribers have earned a tremendous return on BPL. This MLP is currently yielding over 7%. Even though it's not growing quite as rapidly as ETP, BPL's conservative management has led me to set this aside for my own retirement. We should also note that this MLP has increased its payout every quarter for 15 quarters in a row, a pattern that's continued even through these volatile times. What action should you take now? Buy BPL at $52 or less.

Stock #3: Enterprise Products Partners (NYSE: EPD)

Enterprise Products Partners is another great utility-like MLP, and it's growing faster than Buckeye. I would say EPD is probably the fastest growing energy pipeline. It parallels ETP in terms of growth, but it's paying a higher yield, which is why I'm banging on the table for this one. This is a great pick for investors entering retirement because of its above-average growth. I may not retire for quite a while yet, but one of these days I'm going to need that added income, and it's wonderful in the meantime to have a tax shelter. I recommend that you buy EPD for $32 or less.

Speaking of tax shelters, I'm sure by now you're aware that there's an election on the horizon. Now, I'm neither an expert, nor a pollster, but it sounds to me from what I've been reading and hearing on the political front that we may be looking at tax increases in 2009 or 2010 – tax increases on our investment income. If this is the case, you'll be mighty glad that you own some MLPs that will shelter your tax distributions, acting as a hedge against 2009 and 2010.

Be sure to check the website, www.rband.com, for my latest updates on these companies as well as their current buy prices.

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