Energy prices are rising and an income-oriented play is getting love from legendary investor Bill Gross. Earlier this month, Pimco’s former chief investment officer and “bond king” said on social media platform X: “I love MLP pipelines… Better than AI,” noting that these master limited companies are up double digits in past 12 months. Action in MLPs is getting some help as energy prices rise. West Texas Intermediate crude futures rose nearly 20% to 2024 and Brent futures rose 16% as conflict escalates in the Middle East and the OPEC+ oil cartel cuts output. MLPs offer investors a way to bet on the exploration, transportation and processing of oil and natural gas. They also pay attractive dividend yields: Plains All American Pipeline and NuStar Energy, which Gross highlighted in his post, have dividend yields of 6.8% and 7.1%, respectively. Although oil is a hot market right now, natural gas could be the next corner of the energy update for investors interested in pipelines, according to Stephen Ellis, energy and utilities strategist at Morningstar. Natural gas futures are down 26% in 2024, but plays in this space have better growth prospects. “I’ve focused on natural gas over oil because I think the outlook is more attractive over oil, especially for the medium trend,” he said, noting there is demand in Asia for natural gas exports. Midstream refers to the stages of the energy production process between upstream exploration and production and downstream refining and marketing and often refers to pipeline owners. Ellis is particularly fond of Energy Transfer, Enterprise Products Partners and Targa Resources. Energy Transfer Partners and Corporate Products are partnerships and yield 8% and 7.1%, respectively. Natural gas distributor Targa is a C corporation and has a yield of 1.8%. The strategist is in good company on these names: Of the 18 analysts covering Energy Transfer, 17 rate it a buy or strong buy, and consensus price targets suggest about 16% upside from current levels, according to LSEG. Enterprise Products and Targa are both rated by Wall Street consensus analysts, with price targets suggesting upside of 12% and about 3%, respectively, according to LSEG. Business Structures vs. Tax Advantages Master limited partnerships trade on exchanges just like C corporation shares, but there’s a key difference in how they’re structured – and that’s the secret behind MLPs’ red-hot returns. General partners manage the day-to-day operations of the MLP, while investors – known as limited partners – purchase interests and provide the partnership with capital. In turn, the MLP distributes income distributions to investors. Although the partnership is not subject to federal income tax, limited partners face taxes on the income they receive. Contrast this with C corps, which is subject to corporate income taxes and pays dividends that are taxable to shareholders. Because MLPs avoid this “double taxation,” they can offer attractive returns. See below for a list of some major limited partnerships. Beware of tax pitfalls, however, there is a trade-off to income: tax complexity. Partnerships issue their investors a Schedule K-1 each year detailing their share of their income. The thing is, partners may not get this form until mid-March or later – and they need it to file their own individual tax returns. That means MLP investors could find themselves with an extension to file returns: In that case, they could file their returns by Oct. 15. Note that an extension to file is not an extension to pay: You’ll still have to pay the IRS what you owe by April 15. Another issue for investors is where they choose to hold the MLP. Even if your tax reporting is a bit more complicated, you’ll want to keep the MLP in a taxable account. That’s because if you hold it in a tax-deferred account, such as an individual retirement account, you could trigger a tax liability known as unrelated taxable income from the business. This may mean that your IRA will have to file its own tax return.