Tortoise Energy (TYG): Steady path to high returns
Nov 19, 2008

"Master imited partnerships are offering sky-high yields, which makes this an outstanding time to buy into well-positioned MLPs and lock in double-digit or near double-digit yields," explains Elliott Gue.

In his top-notch The Energy Strategist, he discusses his favorite MLP fund for those seeking diversified holdings of these income-vehicles: Tortoise Energy Infrastructure (NYSE: TYG).

"MLPs offer myriad tax advantages for investors. MLPs pay no corporate-level taxation and simply pass through their profits to unitholders. This is why you’ll sometimes hear MLPs called pass-through securities.

"For most MLPs, somewhere between 80 and 100% of the distributions you receive will be taxed as return of capital (ROC) payments.

"This portion of the distribution isn’t immediately taxable. Instead, ROC payments serve to reduce your cost basis on the MLP and aren't taxable until that MLP is sold.

"It's best to hold MLPs in taxable accounts rather than IRA or 401(k) accounts. The reason has to do with a quirky tax issue called unrelated business taxable income (UBTI). 

"If you do want to hold MLPs in an IRA or tax-advantaged account, there are two ways to accomplish this while avoiding UBTI issues: Buy closed-end funds focused on MLPs or purchase i-unit MLPs that pay distributions in the form of additional shares rather than cash. 

"My favorite closed-end MLP fund, Tortoise Energy Infrastructure), offers the benefit of broad diversification in the MLP industry.

"In addition, Tortoise issues a form 1099 at tax time rather than a K-1; this simplifies taxes and allows investors to hold the fund inside a tax-advantaged account with no UBTI difficulties.

"I firmly believe that investors will generally perform better owning individual securities than by owning a fund. However, Tortoise is a worthy addition to any portfolio.

"Like most closed-end funds, the value of Tortoise's portfolio declined with the broader MLP industry. And, as the value of its assets decline, the fund is forced to sell down holdings and use that cash to pay down debt. This is the only way a fund can bring down leverage to meet the 1940 Act.

"However, the situation is improving. Last month, Tortoise offered more fund units for sale to raise cash and used that cash to pay down debt and preferred shares. At the same time, a recovery in the company's portfolio since mid-month has improved the asset side of its balance sheet. 

"The result: Tortoise is now comfortably under the debt limits imposed by the 1940 Act. This should eliminate the need to sell off portfolio holdings at fire-sale prices. Tortoise Energy Infrastructure rates a buy."