How to Invest in Oil Pipelines

Oil pipeline investments pay cash dividends.

Oil pipeline investments pay cash dividends.

Much of America's oil and gas moves through pipelines. Just like trucking companies, railroads or airlines, pipeline companies charge for the privilege of using their pipes to move oil and gas from wells to refineries, to docks, to terminals or to power plants. While pipeline companies are frequently publicly traded on major stock exchanges, investing in them is usually different from owning traditional stock. Instead of buying a share of a corporation, you're usually buying a unit of a Master Limited Partnership, which carries some tax benefits and complexities.

Identify a pipeline company that you'd like to buy. They trade like stocks, but typically offer higher dividend yields than a regular company would.

Research the pipeline company carefully. While pipelines frequently provide steady income and earnings, their prices can fluctuate based on the sentiment of the market. In addition, the company's physical stock could impact its future earnings. Many pipeline companies have very old pipelines that could need expensive investments in the future, lowering their potential profits.

Contact your stock broker to purchase shares in your desired pipeline company.

File your taxes on April 15, claiming your special deduction: Instead of sending you a Form 1099, your pipeline will send you a K-1 partnership return, and you will need to enter the information from the return on Schedule E. You will be able to write off your share of the partnership's depreciation deductions, sheltering some of your dividend income from taxes. Depending on your state's laws and the laws of the states in which your pipeline company operates, you may also need to file state income taxes in states where the pipeline company does business. MLP taxes can be very complicated, so you may want to enlist the assistance of an accountant.

Tip

  • If you'd like to avoid the tax complexities of an MLP, you can invest in exchange-traded funds or mutual funds that hold pipeline MLPs and just pass through regular dividends. Some pipeline operators also have special classes of shares that just pass through cash dividends without the tax complexities of regular MLP units.

Warning

  • Buying MLPs in tax-advantaged retirement accounts, such as an individual retirement account or Roth IRA, negates some of their tax advantages and may also leave you liable for a special tax inside your IRA called Unrelated Business Income Tax. For this reason, you may want to avoid putting MLPs in your IRA.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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