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But the growth of the U.S. energy industry and the need to move that energy around gives advisors confidence that these investments can still pay off. "There's still a lot of value out there," says Nathan Kubik, a principal at Carnick & Kubik, a financial advisory firm in Colorado Springs, Co. Kubik says investors should pick larger MLPs that cater to a diverse group of oil and gas companies so their payouts are not dependent on the strength of one or two oil and gas drillers. Kubik recommends Kinder Morgan Partners, Williams Partners and ONEOK Partners. Baird's Bellamy says Enterprise Products Partners is also a strong, stable MLP. TAX ISSUES MLPs offer big tax advantages -- and they can create some big tax headaches, too. Because MLPs pay no corporate taxes, it leaves them more cash to distribute to investors, but it also puts the responsibility for paying tax onto investors. MLP cash distributions come in two categories, each of which is taxed differently. The bigger portion of the cash generally represents a deduction for the depreciation of the assets in the partnership. Investors don't have to pay taxes on that part of the cash distribution until they sell their shares in the MLP -- creating a potentially useful tax deferral for the investor -- because it is considered a return of capital instead of income. Investors do have to pay tax right away on the smaller, income, portion of the distribution, and that's where the headache comes in. The rate is usually lower than what a corporation would have paid. That's good, but investors have to pay income taxes in every state the partnership operates. For a pipeline partnership, that can be a dozen or more, enough to create a mountain of paperwork. "For some individual investors, it becomes a tax nightmare," warns Kubik. Investors can get around the tax headache -- and sometimes lose some of the advantages -- by owning a mutual fund or an exchange traded fund that invests in MLPs or securities that track the performance of MLPs. The Alerian MLP ETF, for example, pays corporate taxes. That reduces the tax benefit to investors but it also eliminates the need to pay income taxes in several states. The Eagle MLP Strategy Fund I, recommended by Kubik, has found a way to provide the best of both worlds, although for a higher management fee. It avoids paying corporate tax by restricting its direct ownership of MLPs to less than 25 percent of the portfolio. It then uses other financial instruments to mirror the performance of an MLP index. That way the tax benefit remains intact and investors don't have to face the extra paperwork. "We believe MLPs belong in most portfolios," Kubik says. "It's been a good place to be." For more information on MLPs, visit a useful primer compiled by The National Association of Publicly Traded Partnerships here: http://www.naptp.org/PTP101/BasicFacts.html.
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