Master Limited Partnerships: Investors May Not See the Risks

Jack Johns, a retired postal worker in Rincon, Ga., put $50,000 into master limited partnerships in 2013 after reading about them on the Internet. Even though the bet paid off—he earned about $8,000 in less than a year—he sold his holdings because he realized he didn’t understand them. “I think it was just blind luck,” he says of his 16 percent return.

Johns, 65, is just one of thousands of individual investors pouring money into MLPs—tax-exempt, publicly traded companies that own pipelines, storage tanks, and other cash-generating energy infrastructure and give practically all their income to shareholders in the form of distributions. That’s a big part of their appeal: With bond yields at historic lows, MLPs yielded an average 6.7 percent over the past 12 months, according to data compiled by Bloomberg. Along with buying MLP stocks, last year investors put more than $11.9 billion into mutual and exchange-traded funds (ETFs) investing in MLPs, according to Morningstar.