How NML Mastered Tax Efficiency to Deliver 8.2% Yield in Energy Infrastructure

In an era where high yields often come with steep tax bills or volatile payouts, the Neuberger Berman Energy Infrastructure and Income Fund (NYSE: NML) has carved out a niche by combining energy exposure with a tax-smart distribution strategy. The fund's consistent $0.0584-per-share monthly payout—translating to an 8.2% annualized yield—has become a beacon for income investors seeking steady cash flow while deferring tax burdens. But how does NML navigate the dual challenge of fund-level taxation and MLP-driven volatility? Let's dissect its strategy.

The Tax-Efficiency Play: Return of Capital as a Shield

NML's secret weapon is its use of return of capital (ROC) components in distributions. Unlike ordinary dividends, ROC payments are not immediately taxable income. Instead, they reduce the investor's tax basis in the fund, effectively deferring capital gains tax until shares are sold. This structure is critical because:
1. Stable Distributions Amid Volatility: MLPs, which make up a significant portion of NML's portfolio, often face cash flow swings. By blending ROC with taxable income, the fund can maintain payouts even when underlying MLP distributions dip.
2. Tax Deferral for Investors: For example, an investor with a $100 cost basis who receives a $10 ROC distribution would see their basis drop to $90. The tax hit is delayed, preserving liquidity now.

The MLP Engine: Cash Flow and Risks

NML's investments in master limited partnerships (MLPs)—which own and operate energy infrastructure like pipelines, storage, and processing facilities—provide a steady cash flow stream. MLPs are structured to pass through most income to partners, avoiding corporate-level taxes. However, this creates a dual taxation challenge for NML:
- Fund-Level Taxes: Unlike ETFs or most mutual funds, NML is taxed as a regular corporation. This means the fund itself pays federal income tax on its earnings, reducing the net amount available for distributions.
- MLP Complexity: MLPs can generate complex K-1 tax forms for investors, but NML simplifies this by pooling MLP investments and issuing standard 1099 forms instead.

Navigating Macro Headwinds with Tax Mitigation

The energy sector faces headwinds from fluctuating oil prices, ESG shifts, and inflation. NML's strategy mitigates these risks in two ways:
1. Infrastructure Resilience: Pipelines and storage assets are relatively insulated from commodity price swings, as they earn fees based on volume transported, not energy prices.
2. Tax Mitigation at Scale: By pooling MLPs into a single fund, NML avoids the administrative and tax complexity of owning individual MLPs. Investors get the yield benefits without the headaches of K-1 forms.

The Bottom Line: A Tax-Savvy Income Machine

NML's 8.2% yield is a standout in today's low-yield landscape. While fund-level taxes and MLP volatility are real risks, the return-of-capital strategy and infrastructure focus create a compelling balance:
- For Tax-Advantaged Accounts: Investors in IRAs or other tax-deferred accounts can maximize the yield without immediate tax consequences.
- For Long-Term Holders: The deferred tax model rewards investors who hold shares for years, turning ROC into a form of “tax-free” compounding.

Risks to Consider

• Reduced Tax Basis: Over time, ROC distributions can erode your cost basis, leading to higher capital gains taxes if shares are sold at a profit.
• MLP Regulatory Uncertainty: Shifts in tax policies or ESG regulations could disrupt MLP cash flows.
• Leverage: Like many closed-end funds, NML uses leverage to boost returns, amplifying losses in down markets.

Final Take: Act Now for Tax-Smart Income

With the S&P 500 yielding just 1.3%, NML's 8.2% yield is a rare opportunity for income investors willing to navigate a bit of complexity. The fund's tax-efficient distribution structure and focus on stable infrastructure cash flows make it a standout in an otherwise challenging environment.

For investors prioritizing tax deferral, energy exposure, and steady payouts, NML offers a compelling entry point. Just ensure you factor in the long-term tax implications and hold the fund in taxable accounts only if you're in for the long haul.

Invest now while the ROC strategy keeps distributions intact—and the fund's tax shield remains intact.