Bill Gross, the former bond king and co-founder of Pimco, continues to advocate for master limited partnerships (MLPs), such as Energy Transfer and Enterprise Products Partners, highlighting their potential for wealth advisors and RIAs seeking high-yield investments with unique tax advantages.
He emphasizes that while MLPs may have lagged behind their corporate-structured pipeline counterparts in stock performance, their underappreciated tax benefits offer significant long-term value.
In his latest investment commentary, Gross points out the attractive yields of these partnerships, which are around 7% for Energy Transfer and Enterprise Products Partners. In comparison, corporate-structured pipelines like Kinder Morgan and Williams Cos offer yields closer to 4%. Despite the higher performance of corporations this year—Kinder Morgan and Williams are up 40% and 50%, respectively, while Energy Transfer is up 20%—Gross sees long-term benefits in holding MLPs.
Gross, 80, also singles out Western Midstream Partners as another favored MLP in his portfolio. He notes that the tax-deferral feature of MLP distributions can be particularly appealing for long-term investors. These distributions, akin to dividends, allow for deferral of taxes on a significant portion until the units are sold. According to Gross, this compounding tax deferral could add an additional 1% over a 5-10 year holding period, effectively boosting an 8% yield to a 9-10% return.
For many investors, this deferral can become permanent, as they may never sell their MLP units. Upon transfer to heirs, these investments can benefit from the "step-up" feature, meaning certain taxes on the distributions are never paid. For wealth advisors and RIAs managing generational wealth, this can be an attractive proposition for tax-sensitive clients.
Gross believes that MLPs offer a unique advantage over traditional C-Corp pipelines, thanks to their tax structure. "MLPs, despite trading on the NYSE like stocks, enjoy tax benefits granted by Congress in the mid-1980s," he writes. He criticizes Wall Street research firms for often neglecting to highlight these tax advantages, suggesting a reluctance to do so due to legal concerns.
However, Gross acknowledges that MLPs come with certain challenges, particularly for investors who dislike the complexities associated with K-1 tax forms. These forms, required for MLP investors, can complicate tax preparation and add to costs. Mutual funds, for this reason, tend to shy away from holding MLPs, as their investors would also be subject to filing K-1s.
On the other hand, Gross concedes that corporate-structured pipelines, especially those primarily transporting natural gas, have certain advantages. The increasing demand for natural gas, driven in part by its use in power plants supporting data centers for the artificial intelligence boom, has favored corporations like Williams and Kinder Morgan. These companies are perceived as having stronger growth prospects than those transporting oil or gasoline, where demand is more stagnant.
Gross admits that some MLPs, such as Energy Transfer and Western Midstream, have exposure to natural gas, but he recognizes the current market preference for C-Corp pipelines. "There's a clear bias toward C-Corp pipelines, like Williams, Oneok, and Kinder Morgan, which have surged by an average of 20% over the past two months, while MLP pipelines have only risen by 3-4%," he observes.
Despite this short-term market trend, Gross remains convinced that MLPs represent a better long-term investment for RIAs and their clients. He points to their more attractive valuations—price-to-earnings ratios of 12 versus 20 for C-Corp pipelines—and their superior yields, which are double those of their corporate counterparts. "There may be less excitement surrounding MLPs in the current market, particularly given the hype around artificial intelligence, but for long-term investors, the choice is clear," Gross asserts.
For wealth advisors focused on maximizing after-tax returns for their clients, Gross's message is straightforward: MLPs offer compelling value, especially for those willing to navigate the complexities of K-1s and hold these investments over a longer horizon. The combination of high yields, tax deferrals, and the potential for permanent tax avoidance through estate planning makes MLPs an attractive option for income-focused portfolios.
In the face of growing interest in natural gas pipelines and the AI-driven infrastructure boom, Gross's endorsement of MLPs serves as a reminder of the benefits of long-term thinking. While C-Corp pipelines may capture the current market spotlight, RIAs would do well to consider the structural advantages that MLPs provide for their clients, particularly those seeking to balance high income with favorable tax treatment.
As Gross concludes, "In the long run, MLPs are an obvious choice for those who can look past the short-term trends. With yields twice as high as C-Corp pipelines and significant tax benefits, MLPs should be part of any income-oriented portfolio."
