With 10,000 baby boomers hitting retirement age every day, generating stable income has become a pressing issue. Master Limited Partnerships (MLPs) have long been a core part of Charles Mizrahi’s blueprint for creating lasting retirement cash flow. By providing steady “monthly checks,” quality MLPs reliably supplement Social Security, pensions, and other income sources. As part of his retirement income blueprint, Charles Mizrahi advocates several smart practices for investing in MLPs:
- Limit portfolio exposure to a maximum of 10% as an individual asset class. This constrains risk from distribution policy changes, credit downgrades, or interest rate impacts. Reinvesting distributions allow this allocation target to be maintained.
- Strongly prioritize placement of MLPs in tax-deferred accounts like IRAs to avoid cumbersome K-1 reporting requirements. Distributions during accumulation years will also be taxed favorably.
- For non-qualified accounts, hold MLPs in a fund structure such as an ETF, ETN, or mutual fund. These vehicles handle the tax paperwork behind the scenes while allowing investors to receive a simple 1099-DIV form.
- Analyze MLPs with the same rigor as individual bonds. Be stable, strong, and cash flow-positive. Quality is evaluated with ratings.
- Diversify across MLP subsectors such as natural gas pipelines, crude oil pipelines, propane distribution, gathering & processing, refined product terminals, and more. Construct a portfolio of high-conviction names. For more information, read it here.
Ideal MLPs for retirement portfolios
When selecting individual MLPs, investors should apply stringent criteria:
- Investment Grade Credit Rating – Focus only on MLPs rated BBB- and above by S&P and/or Fitch. Distribution cuts are less likely with stronger balance sheets.
- Distribution Coverage Ratio over 1.2x – Cash flow should exceed distributions by 20%+ to allow for internal growth projects. As coverage declines, distribution cuts become more likely.
- Essential, Fee-Based Assets – Assets like pipelines and storage terminals funded by long-term contracts provide stable cash flow regardless of energy prices. Avoid those heavily exposed to commodity price swings.
- Alignment of Incentives – The general partner should have a significant ownership stake and incentive distribution rights in the MLP to align interests with individual investors.
- Seasoned Management Team – Look for leadership with decades of industry experience, financial conservatism, and a history of successful capital allocation. This reduces execution risk.
Diversification within the MLP space
Rather than owning a single MLP, investors should diversify across business segments:
- Natural Gas Pipelines – transport natural gas from wells to end users. Contracts provide steady fee income.
- Refined Product Pipelines – Deliver finished products like gasoline, diesel, and jet fuel to retailers and airports. Requirements for transporting hazardous liquids underpin cash flows.
- Gathering & Processing – Gather raw natural gas from wellheads and process it into pipeline-quality gas. Provides exposure to volume growth.
- Crude Oil Pipelines – Transport crude oil from wells to refineries and storage hubs. Main artery pipelines offer protection from competition.
- Natural Gas Storage – Store natural gas when demand is low and sell when demand spikes, providing price stability. The majority of revenue comes from fixed-fee contracts.
- Liquefied Natural Gas (LNG) – Liquefied natural gas into transportable form, ship overseas, then re-gasify. Provides exposure to growing global natural gas demand.
This diversification across assets provides greater cash flow stability as each segment has slightly different fundamental drivers.