Caution: Master Limited Partnerships (MLPs)

There are some AWESOME deals on a few oil and energy Master Limited Parterships (MLPs).

Careful! Even if the numbers look good, there is a HUGE downside to these.

You might be able to make a ton of profit on the stock price that you buy and sell. (This is not true for all of these right now, but there are a couple that look REALLY good right now.)

So what's the problem? Shouldn't I buy as much of these as I can?

No, I don't think so.

When you buy an MLP, you will pay taxes, of course, on the profit that you make from buying and selling the stock. This is not any different than when you buy and sell other stocks.

You will also pay taxes on the dividends that you are likely to receive. This is not perfect, since you pay the income tax rate instead of the lower capital gains (for stock held for over 1 year). This is not any different for any other dividend paying stock. I'm okay with this, by the way.

So why won't I buy any more MLPs?

When you buy a MLP, you have to pay taxes on the profit that the COMPANY makes, even when they do not distribute those to you as dividends. Another words, you pay taxes on money that NEVER touches your fingers (or account).

1. No value: That's sort of a rip! Incoming money? No! Outgoing money? Yes!
2. Low Cost Control: How do you track how much taxable "profit" this company is making during each quarter. I don't know of any way to budget for something that you don't see while it is accruing and do not see until a while after the fact (when they announce their profits).

One potential benefit is that you might be able to write off any losses. Given that you own the stock, do you really want to "hope" for this?

There are some MLPs at some really good prices right now. Just beware of their downside.