As we've stated in this space before, master limited partnerships (MLPs) are not suitable for every investment portfolio. There are a number of important tax considerations to think of before deciding on the purchase of these high-yielding instruments. Yet, while most individual investors avoid holding them in taxable accounts altogether, there may be at least one method of circumventing the tax consequences of an MLP.
IN PICTURES: 20 Tools For Building Up Your Portfolio

A number of closed-end stock funds trade on the exchanges that hold MLPs exclusively. These closed-end-fund (CEF) MLPs get a different tax treatment than a regular MLP, and require different documentation at tax time. For instance, shareholders in these CEFs receive a Form 1099 rather than a Schedule K-1. At least part of the dividend should qualify for preferential tax treatment. Of course, it's best to check with your financial advisor before going ahead with a CEF MLP purchase; just keep in mind that you may have more options than you thought.

Pay Load
With that in mind, here are a few CEF MLPs that pay well and have looked very strong as of late.

The Cushing MLP Total Return Fund (NYSE:SRV) invests exclusively in energy MLPs and is currently paying shareholders about 14% to hold its stock. The shares have risen over 100% since bottoming in late December. Despite a rough investing environment, Cushing still managed to slightly raise its dividend in 2008. For the 2009 first quarter, however, management lowered the dividend.

The Fiduciary/Claymore MLP Opportunity Fund (NYSE:FMO) pays investors an annual dividend of 10.74% - a dividend, incidentally, that has grown every year since the fund's inception in 2005. FMO is up almost 75% since bottoming in October of last year at $8.03.

The Kayne Anderson MLP Investment Co. (NYSE:KYN) fund pays 9.81% annually, and the stock has appreciated by about 80% in just five months. Kayne Anderson has profited from a large gain in Plains All American Pipeline LP (NYSE:PAA), in which it has a very significant holding.

Slow and Steady
Tortoise Capital Advisors operate two funds worthy of mention, Tortoise Energy Capital Corporation (NYSE:TYY) and Tortoise Energy Infrastructure Corporation (NYSE:TYG), which pay annual dividends of 9.56% and 8.71% respectively (as of May 18). Year-to-date, the funds have appreciated an astonishing 34% and 48%, respectively. Here, too, management reduced the payout slightly for the first quarter, citing the need "to comply with coverage ratios under our leverage agreements and the Investment Company Act of 1940."

The Wrap
MLPs can be served straight up or stewed together in a closed-end fund. For those who desire active management of their MLPs, the above listed companies provide investors with tremendous opportunity. Just remember to check the tax implications with someone in the know first. (For further reading on MLPs, read our article: Discover Master Limited Partnerships.)

Related Articles
  1. Stock Analysis

    8 Solid Utility Stocks for a Bear Market

    If you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
  2. Stock Analysis

    Why Phillips 66 (PSX) is a Solid Long-Term Bet

    Here's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
  3. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  4. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  5. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  6. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  7. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  8. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  9. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  10. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  1. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  2. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!