Master Limited Partnerships, or MLPs, are some of the best paying entities in the markets. And one of the best MLPs has just raised its dividend. Again.
On January 17, 2013, Kinder Morgan Energy Partners (KMP) declared a quarterly dividend of $1.29. That's a $5.16 annual payout, per share, for a sweet yield of 5.86%. It's also an increase of $0.03 per share over the previous quarter's dividend … the latest in a series of consistently rising dividends.
Now, 5.86% is nice hefty payout, and pretty attractive to investors hungry for yield. But like most things in the market, not every MLP is right for every investor. Before we take a deeper look at KMP, let me show you exactly how an MLP works.
A Quick MLP Primer
In order for an entity to be legally classified as an MLP, it must derive most of its income from either real estate, natural resources, or commodities. And in exchange for special tax considerations (MLPs pay no corporate taxes), they agree to pay out most of their profits to shareholders. That's what makes them so lucrative.
Another thing to keep in mind is tax complication. When you buy into a MLP, you're essentially becoming a partner in that company. As such, your distributions from the company will require you to deal with K-1 tax forms, making your tax planning more complex … and more expensive.
The other problem with MLPs - even an established one like Kinder Morgan Energy - is market risk. The energy sector is historically more volatile than the general stock market. If there's a downturn in energy prices, that will affect the amount of energy transported through their pipelines … and shareholders will feel the pinch downstream.
"And Get Paid They Did"
Kinder Morgan Energy Partners is the largest mid-stream energy company in North America, with approximately 75,000 miles of pipelines and 180 terminals that they either control or have an interest in. They transport natural gas, refined petroleum products, crude oil, carbon dioxide and more. In addition to the pipelines, their terminals handle gasoline, jet fuel, ethanol, coal and steel.
As a midstream company, they act as the middle man between energy suppliers and the markets. So they still get paid whether energy prices go up or down. And get paid they did.
In fact, the company's revenue for the quarter was up 30.5% on a year-over-year basis. And analysts are predicting that Kinder Morgan Energy Partners LP will post $2.55 earnings per share for the current fiscal year. That's more than enough to cover their payout. But there are several things to understand before you decide if KMP - and its sweet 5.86% yield - is for you.
First of all, to call its price-to-earnings ratio "high" is an understatement. With a P/E of 53.86, those are some pretty expensive shares - even when you take the hefty yield into consideration. Another thing to consider - at about $89 a share, they're trading just slightly off their 52-week highs ($90.60). If that price becomes resistance, there's not going to be much room for prices to run.
That may be one reason why several analysts have recently downgraded KMP from a "Buy" to a "Neutral." That's not the worst thing in the world - but it's a warning.
Bottom line: If you really want to get involved with KMP and its nice 5.86% yield, I might suggest buying on a dip in price. Shares will be more affordable, and you'll get an even better yield (because yield goes up as price goes down).
Also, as an alternative, I'd suggest looking into one of the many funds or ETFs that are made up exclusively of MLPs. You'll still get some nice income flow, without the added tax worries. And since your shares will expose you to a group of MLPs across a sector, the risks associated with being in one single company is reduced.
The ALPS/Alerian MLP (AMLP) is one. They actually hold Kinder Morgan Energy as part of their portfolio. With a current yield of almost 6%, it's comparable to shares of KMP, without the single-entity risk or the tax complications.