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Master Limited Partnership--MLP

MLPs are partnerships that trade on a public exchange. As businesses, MLPs have an important advantage over corporations: They don't pay taxes at the company level but instead at the partner, or unitholder, level. That stands in contrast with corporations, which pay taxes at the company level and again at the shareholder level when their dividends are taxed.

To qualify for this favorable tax treatment, MLPs must generate 90% of their income from what the IRS considers to be qualified sources--in the case of most MLPs, that means producing, processing, and especially transporting energy products. The vast majority of MLPs operate in the energy sector, and many MLPs run pipelines that move natural gas and other energy products around the country.

Master limited partnerships often catch the eye of many income-oriented investors because their payouts can be compelling: Yields routinely run as high as 6%, 7%, or even higher. The fact that MLPs can skirt taxes at the business level has a helping hand in boosting the income they can pay out to their unitholders.

An even bigger factor behind MLPs' lush yields, however, is that once a pipeline is up and running, MLPs have little in the way of ongoing capital investment but a lot in the way of cash flows. That means that most of their income can flow through to the partners in the business.

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