Most of the time I recommend highly diversified, dividend growth, business sector agnostic ETF funds for investors who don’t have a lot of time to buy and manage a portfolio of individual stocks. Therefore, ETF’s like VYM, SCHD, DGRO and DVY are some of my favorites. But I also like to add some sector funds for health care, technology and energy.
Energy is actually a very broad classification. One subset of the energy sector includes “master limited partnerships.” These are called MLP’s or “Limited Partnerships.” In fact, if the company has “LP” in its name, it is a limited partnership. Be careful about adding MLPs to your tax-deferred accounts. This can create an income tax nightmare. In fact, Fidelity Investments will charge you for the work they have to do to create the reporting you will need if you buy them in your IRA or your Roth IRA. MLPA doesn’t cause that problem.
MLPA focuses on businesses that store and transport petroleum, gather and process petroleum and store and transport natural gas. Transporting often means via pipelines. This is an attractive business because it doesn’t depend as heavily on the price of oil, gasoline or gas. The business thrives as product moves or is stored.
There is a way to invest in MLP’s in your IRA. There are ETF’s like MLPA that do the tax work for you and issue a 1099-DIV instead of the K-1 at tax time. I recently purchased MLPA, after verifying they don’t issue a K-1. This is a higher-risk investment, but the dividend yield and added diversification into the energy sector are attractive to me. This IS NOT necessarily a dividend growth ploy. Also, be aware that XTF.com doesn’t give MLPA a high rating and the expense ratio is 0.45%.
My recommendation: Do the basics first by investing in broad index-based ETF’s that cover the S&P 500 or dividend focused ETF’s like VYM and SCHD. Then consider funds that focus on the sectors that you find attractive as long-term investments.