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MLPs and Tax-Smart Investing

08/07/2015 10:00 am EST

Focus: MLPS

Tim Plaehn

Investment Research Analyst, Investors Alley

Income expert Tim Plaehn has just launched a new advisory service, Tax-Smart Income Hunter. Here, he explains the goals of the newsletter and highlights a favorite idea within each of its three model portfolios.

Steven Halpern: Joining us today is Tim Plaehn, editor of the newly launched advisory service Tax-Smart Income Hunter. How are doing today, Tim?

Tim Plaehn: Doing really well, Steve.

Steven Halpern: Well, thank you for joining us. Many of our MoneyShow listeners are familiar with your work as editor of Investor Alley's Dividend Hunter. Could you explain how the new service differs from your traditional income advisor?

Tim Plaehn: Yes, Steve, I’d be glad to. I’ve found with the Dividend Hunter that in the MLP sector—master limited partnerships—there was a lot of confusion.

First, they’re complicated; there’s more taxes, and for the broad range of investors I had in the Dividend Hunter, MLPs really were a product for a smaller portion of those people because of their complications.

So, the Tax-Smart Income Hunter is mostly about master limited partnerships, which have a lot of tax advantages for the high tax bracket investor, but they also need to get a deeper level of understanding of how these partnerships work before they invest, so we have a new service.

Steven Halpern: Now, when you say complicated, these are complicated in terms of just having some different rules, but even for the typical investor, when they get some experience and they use an advisory service like yours, this isn’t insurmountable in terms of them learning the ins and outs, correct?

Tim Plaehn: Oh yeah, not at all, not at all. I mean, a lot of it...there are the tax benefits and a little bit of challenges, but also just how these partnerships manage and operate their businesses to develop a cash screen that they can pay to investors as distributions.

I just find so many people just don’t understand the whole model of a partnership to generate cash flow and I want my subscribers to the new service to really understand how they work, so they can see the differences between the different MLPs.

Steven Halpern: One very interesting format that you’ve undertaken with your newsletter is the development of three specific model portfolios. Could you take a minute; let’s walk through these. The first is your income portfolio, focused on a steady stream of safe income. Could you expand on that?

Tim Plaehn: Yes, the traditional reason to invest in MLPs is because they pay very attractive yields and many MLPs will grow those distributions—a lot of them every quarter—so it’s a very nice growing income stream.

And what I want to do there—especially now with the energy sector getting very turbulent and volatile—is pick out those that provide a high attractive yield with a safe and growing distribution rate.

So, that’s for the traditional MLP investors that really want to get that good yield but want to make sure that there are quality companies behind the payments, too.

Steven Halpern: Now, to highlight this portfolio for investors, one MLP that meets your criteria is NGL Energy Partners (NGL). What’s the attraction here?

Tim Plaehn: NGL Energy Partners is a fairly new MLP. It launched, I think, in 2011. It has a very, very attractive yield. It’s yielding up over 9% right now, about 9.25%, but it's also been able to grow its distributions in high single digits and the market just hasn’t discovered this MLP.


It’s a $3 billion market cap, which kind of puts it in the middle of the pack. I think what has kept people away, it’s quite volatile—unit price wise—because only about 25% of the units are in the public float and the rest is still held by insiders in the general partner.

Steven Halpern: Now, let’s turn to your Total Return portfolio where you focus on distribution growth rate along with current high yield and one stock you like in that area is Tallgrass Energy (TEGP). Could you tell us a little about this Total Return portfolio and specifically Tallgrass Energy?

Tim Plaehn: Yeah, kind of a less well known way to invest in MLPs is to go with the fast growth MLPs and these are ones that increasing our distribution rate at a very high rate, generally, high teens up to mid-20s.

And probably the best case is Tallgrass Energy Partners (TEP), which is an MLP that it has increased its distribution by over 40% each of the last two years.

And just a month ago, the (private) company that controls Tallgrass Energy Partners launched an IPO with the general partner, Tallgrass Energy GP LP (TEGP).

TEGP should be able to grow its distributions by double the rate of the underlying MLP.

I expect Tallgrass Energy Partners probably to get their distribution growth back into the 20% range, so TEGP should be able to be, if things work out, to see 40% distribution growth.

The math tells us if the distributions are growing by 30% or 40% a year, the unit price should go up at the same level, just to keep up.

Steven Halpern: Now, finally, your third model portfolio is what you call an IRA-friendly portfolio. First, could you explain what makes an investment idea suitable specially for IRA investors, and also, could you highlight InfraCap Active MLP (AMZA), one of your recommendations in this area?

Tim Plaehn: I can do that. Well, in the MLP space—and this is the question when I work, do MoneyShow presentations—one of the questions I get probably the most is "Can I have own MLPs in my IRA?" And you can, but it can become complicated for tax purposes.

Because I have so many people subscribing, I just put a general recommendation as to not own individual MLPs in IRAs because you cannot foresee whether they’ll be tax issues, so I try to find MLP-related investments that work in an IRA and you don’t have to worry whether there’ll be negative tax consequences or not.

Steven Halpern: And InfraCap Active fits in that category.

Tim Plaehn: Yes, it’s an ETF. Yes, an exchange-traded fund. It is the first actively managed ETF in the MLP space and what the managers are doing, they're using the same AMZI index that the big ETFs follow.

That’s the Alerian MLP infrastructure index but the folks in InfraCap have written their ETFs so they can use different weightings outside of the Alerian index ratings.

They can sell covered calls and they can use the general partner companies as well, so this should outperform over time a regular MLP ETF, and with the energy sector down now, it’s yielding above 10%. In its short life, it’s been increasing its dividend by 1% every quarter.

I talked to the managers over there pretty regularly. They got some good stuff going on and it’s a great way to get MLP exposure, especially if you got tax qualified money and you don’t want tax problems in your IRA.

Steven Halpern: Again, our guest today is Tim Plaehn. Congratulations on the launch of Tax-Smart Income Hunter and thank you so much for your time.

Tim Plaehn: Steve, it was great to talk to you today.

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