Retirement Income and Inflation Protection Strategy

Master limited partnerships (MLPs) are ongoing businesses which pay out most of the cash flow to investors. Master limited partnerships are like bonds in that they pay out regular cash to investors. However, they are unlike bonds in that the payout to investors has historically risen with inflation and through increasing profits. Master limited partnerships are also like stocks in that they are equities and trade on the New York Stock Exchange or NASDAQ. Unlike typical companies, the income of the MLP is not taxed at the corporate level. All the money that would have been taxed is passed along to the investors. The effect is that there is substantially more cash available to investors.

Investors seeking to build a MLP portfolio should consider the following:

• The balance sheet and income statements are reviewed for strength.
• Projections for distribution increases over the next three to five years are ascertained.
• Examine the ratio of cash flow paid out to investors with the amount that has been available to pay out.
• Divide the MLPs into three risk profiles which are as follows: Rock Solid, Secure and Other.
• Examine the percentage of the cash payment to investors that is tax deferred.
• Review research from a variety of companies and industry sources.

Unlike bonds, MLPs have a history of raising distributions at a faster rate than inflation. For example - Buckeye Pipeline, headquartered in Radnor PA, paid out $1.20 in 1991. Today, Buckeye pays out $3.71 per year, a 209 percent increase in nineteen years.

When people as me about the risks of MLPs compared to bonds, I ask them if they would be happy to be assured they would get their money back in a twenty year U.S. Treasury bond. If we look back over the last nineteen years, would you have been happy getting your money back from a triple A rated bond? A first class stamp was $.25 at the beginning of 1991.

If you invested $10,000 into a twenty year U.S. Treasury bond you would have received approximately $800 per year for twenty years. In January of 1991 you could have bought 3,200 first class stamps per year. Today you could only buy 1818 stamps per year. If you had invested the same $10,000 in Buckeye Pipeline, you would have received approximately $1000 per year and bought 4000 stamps. Today you could purchase 7026 stamps per year with the cash flow generated.

So, with Buckeye you could purchase 7026 stamps vs. 1818 stamps per year from the U.S. Treasury bond. The original investment was the same. When understanding risk, it is important to rank the risk. If you consider inflation as a risk over the next fifteen years, you need to own something that can raise prices and pay you an increasing return. Of course there is no guarantee that the future return from a portfolio of MLPs will grow at any particular rate. Just as there is no way to guarantee just how fast the purchasing power of the U.S. dollar will drop over the next fifteen years. I am willing to bet that you will buy fewer postage stamps in 2025 than you can today with the income you receive from U.S. Treasury bonds.

©DeWitt Capital Management

David T. DeWitt, CFP specializes in Creating Income for Life, Growth Stocks and IRAs. For our latest report, visit our website at http://www.incomingchecks.com