Owning Master Limited Partnerships (MLPs) requires accepting tax hassle when reporting income from their K-1 tax forms. However, Enbridge Energy (EEQ) and Kinder Morgan (KMR) also have stock equivalent securities which are tax friendly.
Enbridge pipelines bring oil from oil shale fields in Alberta, Canada to the upper midwest (US) continuing east to eastern Canada. Their oil imports to the US exceed 1 million barrels per day. Enbridge has major expansion programs which will add significantly to their pipeline capacity in the next few years. Kinder Morgan is the largest MLP with an excellent track record in the last 12 years. Among their many pipelines, one brings oil from the Canada's oil shale fields down the west coast to California.
Their stocks have mirrored price moves of the underlying MLPS. EEQ had been near 51, pretty much remaining within a couple of points of 51 for the last year, while the Alerian MLP was hammered badly. Then came September when it ran into a brick wall. The stock dropped to the 40s, then 30s and now is in the 23s providing a yield of 17%. KMR did very well during the same period, even rising while other MLPs were being hit hard. But selling caught up with them 3 months ago. The stock fell from the high 50s into the 40s and now is 38, providing a 10½% yield.
Their stock equivalent securities are very investor and tax friendly. Enbridge (EEQ) and Kinder Morgan (KMR), as stocks, pay dividends. Each share is backed by one MLP unit. When a distribution is paid, the stocks pay a comparable stock dividend adding shares to the investment. Because no money dividend is paid, there is no 1099. As stocks, they can be purchased in IRAs and other retirement accounts.
In addition, there are a few closed end funds specializing in MLPs. One I follow closely is Kayne Anderson Energy Total Return Fund (KYE), which currently yields an eye popping 23%. They invest in MLPs but take care of tax issues. Like other closed end funds, they pay out excess income after expenses. Their dividend had been under $2. It was increased in the last couple of years bringing it to $2.16 presently. The market is pricing a lot of ugliness going forward, however the very brave might find the extraordinary yield very tempting.
The high yields are from major doubts about the future of the dividends (really the underlying distributions of the MLPs). The two companies have excellent long term records: EEQ has been operating pipelines from Canada for over 50 years and KMR has become the largest MLP during its 12 years. KYE is new with only a three year track record. Since it owns a portfolio of securities, diversification should help it cope with any problems ahead. These securities can be interesting for those willing to accept risk for very high yields, long term price appreciation would be a bonus.
Disclosure: no positions