Most pipelines used to be owned by the very big oil and gas companies, but as their sources for fuel went overseas and their plans to build new refineries in the US were put on indefinite hold by the NIMBY crowd ("not in my back yard"), they either spun off or sold off these pipeline facilities. Without going into political and tax history (redundant?), the pipeline (long distance) and gatherers (from individual US wells) became organized as master limited partnerships many of whom became listed on the US stock exchanges. They have many of the same advantages as do REITs in that their dividends are taxed only once instead of once at the corporate level and then again at the dividend receiver level. In effect they pay little or no corporate tax for the good reason that they aren't corporations. However, for arcane reasons they may not be held in tax-deferred IRAs and 401Ks etc. REITs can be held in those accounts, but not MLPs. So they were not terribly interesting except to people who paid very little income tax and who were also excellent bookkeepers and accountants to keep track of the depreciation and other tax factors forever.
Many of the individual MLPs pay 6-9% currently. Many of them also use some leverage through preferred shares or lines of credit. What has occurred over the past three to five years that they have all been in existence is that they tend to trade in cycles opposite to the oil and gas royalty trusts. When the royalty trusts are going up, the MLPs are going down, and vice versa. The market economics for this are not all that complicated, but I had never seen an analysis of it. Royalty trusts are tied directly to the price of oil or natural gas, and the trusts have no debt. Pipeline MLPs have long term contracts to move the products based largely on volume, not on price of oil and gas, although there are some minor PPI or price adjustments. But the pipes have a lot of debt, typically 25-50%. So they do well when interest rates are low and credit is easy and not so well when credit tightens and credit spreads go up. Even if oil and natural gas and gasoline prices go way down (we hope!), the volume (gallons, barrels, cubic feet) of the product moved is not going to collapse. So the MLPs are a better bet in a recession or other event of price declines. Plus interest rates tend to go down in recessions.
In the past two to five years several investment firms, primarily Kayne Anderson and Tortoise Capital, have developed public traded funds holding MLPs within a structure which made it possible for them to be owned by US tax deferred accounts without the tax difficulties of native MLP pipelines. And since those stocks have gone down during the credit crisis of the past year, they are yielding almost as much as the royalty trusts. Two of the earliest, and therefore most seasoned, stocks are KYN, yielding 7.3% annually, and TYG, yielding 8.2%. Regrettably they pay quarterly rather than monthly dividends, unlike the royalty trusts. But the fact that royalty trusts "may be" topping out and MLP aggregators may be bottoming out and are paying similar dividend rates, I am switching a part of my investments in royalty trusts to KYN and TYG. Not all by any means, because I could be wrong or I could be early, but probably 50-66% to start with. Also I am phasing in with dividend schedules in both classes.
