Give former President Ronald Reagan credit for the American
energy boom we're currently living through.
In 1986, President Reagan took a decisive step toward
advancing America's energy independence. 27 years later, some
investors are still reaping the profits of this landmark policy
Let me explain…
High oil prices and gas rationing of the 1970s were still a
recent memory. And the Reagan Administration decided that from
happening ever again.
The solution was a special deal for select U.S. companies. His
goal was to encourage massive amounts of capital investment to
secure America's energy future. How?
Simple. The President decided to provide a tax exemption to
companies in the oil and gas infrastructure business.
A company had to meet stringent guidelines to qualify for this
special status. For instance, at least 90% of sales had to come
from America's energy infrastructure.
But if a business met those requirements, it received a huge
tax break. Specifically, it no longer had to pay federal or state
taxes on its profits.
These companies are known as Master Limited Partnerships, or
MLPs. And because of their tax benefits, they can be extremely
lucrative for their shareholders.
Since these companies are technically "partnerships," their
shareholders are essentially "partners." Unlike most business
partnerships though, MLPs are publicly traded companies.
Perhaps the best aspect of these partnerships is the fact that
they are required - by law - to pay 90% of their profits to the
partners. Called distributions, these payouts are very similar to
The result is very high dividend yields. The average yield
from MLPs over the past decade is more than 7%. And some
currently pay more than 10%.
Today, almost all MLPs are in the business of oil and gas
pipelines. There really isn't a more profitable aspect of the
Pipeline operators are paid based upon the volume of fuel
moved - not the commodity price. So the price of oil or gas
doesn't really matter. All that counts is the amount of oil or
gas moving down the line. This is important - because it means
these companies aren't as sensitive to price fluctuations as
other types energy stocks.
The pipeline business lucrative, and also capital intensive -
which is a good thing for existing MLPs. Pipelines are so
expensive to build, few startups are coming along to threaten the
old guard. That's what Warren Buffet calls a "moat."
Once put in place, pipes are relatively cheap to maintain. So
after the initial outlay of capital, a huge percentage of all
future income is pure profit.
And since pipes are just pipes, this isn't exactly an industry
that requires much investment in R&D. Today, pipelines remain
the far and away the cheapest method to move vast amounts
of petroleum across land.
It all adds up to an extremely attractive sector for income
investors. MLPs are an indispensable component of America's
booming energy infrastructure, and they're able to legally avoid
You know that America's domestic oil and gas production is
surging, thanks to a new technology called fracking. New
discoveries and increased production are good news for the oil
industry. And investors in MLPs can expect many years of healthy