We live in a low interest rate world and are likely to do so for some time. This has taken a significant toll on the income-generating segments of investors’ portfolios. While traditional core fixed-income holdings of government bonds, high-quality corporate debt, high yield bonds and munis still have their place within one’s total portfolio, it makes sense to look into other investment vehicles that could deliver high current yields and superior risk-adjusted returns. Master limited partnerships (MLPs) can fit the bill.

As Morningstar has commented, these limited partnerships, which trade on stock exchanges, offer quarterly paying, yield-generation potential that can best Treasuries, corporate bonds, utilities and REITs.

Most MLPs are in the business of transporting oil and gas through pipelines that they own. Because they do not produce or sell the energy they transport, the return stream for most MLPs is less sensitive to commodity price fluctuations than other high-yield energy-related investments.

MLPs are tax-efficient investments (when held in taxable accounts). Unlike corporations, MLPs pass income on to their investors, so they are not subject to corporate income taxes. Investors pay tax on their individual portions of an MLP’s income, deductions, gains and losses. Pass-through expenses of asset depreciation and operating expenses can be used to reduce or eliminate tax due on income received from the MLP.

MLPs are also a tax-efficient estate planning tool for transferring wealth. When MLP investments are transferred to an heir after the death of the owner, the cost basis of the MLP is reset to the price of the unit on the date of transfer, thereby eliminating a tax liability. Investing directly in an MLP gives you ownership in an underlying business or asset, so you should perform due diligence on an MLP before making an investment, evaluating factors such as management’s track record, returns on invested capital, and competitive and financial positions, as well as its growth prospects.

Direct investment is not the only option. Exchange traded notes (ETNs), exchange traded funds (ETFs), and mutual funds can also give you exposure to MLPs and their income. The ETNs and ETFs tend to be indexes created to track the performance of a number of MLPs that hold energy infrastructure and related shipping assets. Because ETNs are senior, unsecured obligations of the issuer, from a due diligence perspective, you need to evaluate the counterparty risk of the issuer when considering that product’s risk/return.

The multiple ways of investing in MLPs have very different tax characteristics, with some allowing for more simple accounting and tax filing than others.

Which investment option is best for your situation? Consult your wealth advisor and seek to answer these questions:

• Who will conduct the investment due diligence?

• How much should I allocate?

• Should I use my taxable or tax deferred account?

• With tax considerations in mind, should I directly hold MLPs, or use ETNs, ETFs or mutual funds?