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This will be the first of a series of articles focusing on specific industries and isolating the CCC companies within those industries.

Note:The Dividend Champions spreadsheet and PDF have been updated through 2/28/11 and are available here. Note that all references to Champions mean companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of 5-9 years. Together, all of these companies may be referred to using the abbreviation “CCC.”

What are MLPs?

Master Limited Partnerships, or MLPs, are specialized companies that are not organized as typical corporations, instead issuing partnership units in place of common shares. Adhering to special provisions of the tax code, these partnerships are “pass-through” entities that are not subject to taxation, instead passing along all of their income and expenses (and responsibility for any taxation) to owners of these partnership units. Here is a brief description. Note that the criteria for maintaining MLP status requires that the company derive at least 90% of its cash flows from real estate, natural resources, or commodities. The vast majority of the MLPs that are publicly traded are engaged in the area of oil and gas transportation, processing, and storage. A good source of industry-wide information can be found here.

Technically, MLPs do not declare dividends, but instead make “distributions,” generally on a quarterly basis. Because partners also receive an appropriate portion of expenses, such as depletion and depreciation, their net income is typically much lower than the gross amount of the distributions. As a result, taxable income is low and the distributions are largely treated as a return of capital, which reduces the investors' cost basis. Over time, this means that, instead of being taxed on current income, MLP investors will enjoy increasing capital appreciation that has the potential of reducing the cost basis to zero, turning the entire initial investment into a capital gain (when sold), which (currently) would be taxed at rates below those of “ordinary” income. If and when the cost basis is reduced to zero, subsequent distributions are considered current income.

The Nuisance Factor

Many potential MLP investors are deterred by the supposed tax “nightmares” that revolve around reporting requirements. MLPs issue a K-1 form instead of the 1099 forms that stock owners receive at the end of each year. The K-1 form spells out his or her share of partnership income, gains, losses, deductions, and credits.

Unlike 1099 forms, K-1s are not required to be mailed by January 31, so delays in receiving the forms may delay tax filing. Because of the numerous elements involved, individuals may also find the forms confusing, so employing a good tax professional is usually a wise move. (Note that this article does not intend to offer tax advice, and it should not be considered authoritative in that area.) Of course, in discussing the tax advantages of MLPs (little current tax income, reduction of cost basis, etc.) relates to owning MLPs in a taxable account. Many advisors suggest that MLPs should not be owned in a tax deferred (retirement) account, simply because doing so fails to take advantage of the favorable taxation enjoyed by “normal” MLP ownership, effectively turning low-tax income into income that will be taxed at “ordinary” rates upon withdrawal.

The knock against owning MLPs in retirement accounts has some validity, and even the NAPTP (see above) cautions against it, although its primary concern is UBIT, or Unrelated Business Income Tax, which is income unrelated to the MLP's exempt purpose. If such income exceeds $1,000 per year, then the status of a retirement account can be endangered. However, few MLPs generate such income and it would take ownership of thousands, if not tens of thousands, of partnership units before an individual would be likely to earn a significant amount of UBIT.

The more general notion that owning MLPs in retirement accounts would “waste” the tax advantages may also be overblown for two reasons. First, the idea of turning low-tax income into income taxed at ordinary rates (on withdrawal) also applies to other potential investments, including stocks, so if the investor eliminates such investments from consideration in his or her retirement accounts, then that person may be left with very few alternatives. More important, of course, is owning assets that will grow as much as possible, no matter what the tax rate may eventually be on withdrawal...and that rate may actually be lower than their current marginal rate.

The second reason not to be dissuaded revolves around practicality. Given the increased use and funding of 401k, IRA, and other retirement accounts, potential investors may not even face a choice of whether to own something in taxable or tax-deferred accounts. If all your investable cash is in a 401k or Roth IRA, then the choice is simple.

The Companies

The bad news is that there are no Champion MLPs. But that's just because they haven't been around long enough to have streaks of higher distributions that stretch to 25 years or more. The longest streak belongs to Buckeye Partners (NYSE:BPL) at 16 years, followed closely by Kinder Morgan (NYSE:KMP) at 15 years and Enterprise Products Partners (NYSE:EPD) at 14. The good news is that MLPs are the fastest growing industry (in terms of the numbers of companies) and the 30 Contenders and Challengers listed below (with one exception) offer yields between 3.83% and 7.98%, as of February 28.

Although there have been MLPs that had to cut or freeze their distributions, they appear to be few in number, and most of those listed actually increase their distributions each quarter. Because the yields are relatively high, most of the growth rates are somewhat modest, but should keep up with inflation. Investors can also get some geographic diversity, as demonstrated by this map of the operations conducted by Kinder Morgan (KMP).

Unfortunately, because of the nature of their earnings and distributions, traditional measures like the Price/Earnings ratio, the Payout Ratio, and the PEG Ratio are too high to be comparable to other companies, so I'm showing Market Cap, which may be a good indication of the financial stability of the MLPs shown, along with the percentage variation from each security's 52-week high and low.

Note that most are trading close to their highs, but a few stand out as having soared dramatically from their low prices. I've shortened up the Industry column due to table width concerns, but most of these MLPs can be described as oil and gas pipeline companies.

MLPs could be called “middlemen” in the chain of extracting and bringing these elements to market, but that simple term obscures the fact that many of these companies own not only the pipelines, but also the storage and processing facilities. Because their revenue and income comes from the handling of oil and gas, they are not as vulnerable to commodity prices as are the major oil and gas companies.

No.

2/28

MktCap

% from

% from

DGR

Company

Symbol

Industry

Yrs

Price

Yield

($Mil)

Low

High

1-yr

3-yr

5-yr

10-yr

Alliance Holdings GP

AHGP

Coal

6

55.14

3.83

3,300

110.9

3.4

12.8

22.6

n/a

n/a

Alliance Resource Part.

ARLP

Coal

9

77.24

4.45

2,840

103.5

0.7

8.6

13.4

15.3

12.4

AmeriGas Partners LP

APU

Propane

6

48.28

5.84

2,760

37.9

6.3

5.1

4.9

4.5

2.4

Boardwalk Pipeline LP

BWP

Natural Gas

6

33.21

6.26

6,400

129.2

3.0

4.1

5.4

n/a

n/a

Buckeye Partners LP

BPL

Oil&Gas

16

64.82

6.09

3,340

44.0

9.6

5.5

5.9

6.2

4.8

Crestwood Midstream

CMLP

Natural Gas

5

30.10

5.71

858

87.2

5.3

8.0

n/a

n/a

n/a

DCP Midstream Part.

DPM

Natural Gas

6

42.26

5.84

1,590

56.4

0.8

0.8

7.0

n/a

n/a

Duncan Energy Partners

DEP

Oil&Gas

5

40.73

4.47

2,350

82.9

0.7

3.6

19.4

n/a

n/a

Energy Transfer Equity

ETE

Natural Gas

5

40.19

5.37

8,960

47.5

1.7

2.6

14.0

n/a

n/a

Enterprise Products LP

EPD

Oil&Gas

14

43.60

5.41

36,710

50.1

1.7

5.5

6.1

6.6

8.3

EOG Resources Inc.

EOG

Oil&Gas

12

112.31

0.57

28,540

31.5

2.5

7.0

22.7

32.4

25.1

Exterran Partners LP

EXLP

Oil&Gas

5

29.70

6.36

953

59.2

4.9

0.3

10.4

n/a

n/a

Genesis Energy LP

GEL

Oil&Gas

8

29.18

5.48

1,160

88.6

1.2

9.2

17.0

19.6

(1.8)

Holly Energy Partners

HEP

Oil&Gas

7

59.65

5.67

1,320

55.3

0.1

5.1

5.6

22.8

n/a

Inergy LP

NRGY

Propane

10

41.48

6.80

4,550

36.7

5.6

5.7

6.3

6.8

n/a

Kinder Morgan Energy

KMP

Oil&Gas

15

73.65

6.14

23,280

28.3

0.5

2.9

8.4

7.1

10.9

Magellan Midstream LP

MMP

Oil&Gas

11

60.44

5.01

6,800

51.7

0.9

2.4

5.3

8.1

n/a

Natural Resource Part.

NRP

Coal

8

35.61

6.07

3,780

97.8

4.3

0.2

5.6

9.0

n/a

NuStar Energy LP

NS

Oil&Gas

10

70.15

6.13

4,530

35.4

2.1

0.7

4.3

5.2

n/a

ONEOK Partners LP

OKS

Oil&Gas

6

83.15

5.48

8,470

225.2

1.3

3.0

3.9

6.9

5.3

Plains All American LP

PAA

Oil&Gas

11

65.47

5.85

9,240

48.4

0.3

3.6

4.6

7.8

7.5

Spectra Energy Partners

SEP

Oil&Gas

5

32.87

5.48

2,640

32.5

9.5

12.6

78.3

n/a

n/a

StoneMor Partners LP

STON

Cemeteries

7

28.82

7.98

449

60.0

14.0

0.5

3.2

3.3

n/a

Suburban Propane Par.

SPH

Propane

13

57.78

5.90

2,050

47.5

2.1

2.7

5.7

6.6

4.9

Sunoco Logistics Part.

SXL

Oil&Gas

10

88.49

5.33

2,930

75.7

0.9

9.9

10.7

11.9

n/a

Targa Resources Part.

NGLS

Oil&Gas

5

34.25

6.39

2,590

67.5

2.8

1.4

35.5

n/a

n/a

TC Pipelines LP

TCLP

Oil&Gas

11

54.26

5.53

2,510

61.4

0.6

2.4

4.7

5.0

4.9

Teekay LNG Partners

TGP

LNG Trans.

7

38.08

6.62

2,060

92.8

4.6

3.9

6.1

29.6

n/a

Transmontaigne Part.

TLP

Oil&Gas

7

39.78

6.13

575

268.0

2.2

1.3

7.9

34.2

n/a

Williams Partners LP

WPZ

Oil&Gas

7

51.86

5.42

14,520

49.8

0.1

4.4

9.1

78.0

n/a

Averages for

30

MLPs

8.43

52.09

5.59

6,402

75.4

2.9

4.5

12.2

15.6

7.7

Averages for

447

CCC Co's

16.7

47.91

2.91

16,745

40.9

6.7

7.9

9.8

12.5

10.3

In addition, there are seven MLPs in the Appendix of companies with 4-year streaks of higher payouts:

Company

Symbol

Ex-Div

Brookfield Infrastructure Part.

BIP

2/24/11

El Paso Pipeline Partners LP

EPB

1/28/11

Evercore Partners Inc.

EVR

11/23/10

Navios Maritime Partners LP

NMM

2/7/11

Penn Virginia GP Holdings LP

PVG

4/29/10

Teekay Offshore Partners LP

TOO

5/5/10

Western Gas Partners LP

WES

1/28/11

(The Ex-Dividend Dates listed are from their most recent increases.)

Summary

The MLP industry is the source of the fastest growth in the CCC universe in terms of participation and offers the highest yields and, in most cases, quarterly increases in the distribution. Most are Mid-Caps (between $2 and $10 billion), with a few Large Caps and Small Caps mixed in. MLP investors can diversify among oil and gas pipelines and providers of coal, propane, LNG (Liquified Natural Gas) transportation, and even an owner of cemeteries. Getting past the perception of a “nuisance factor” is the first hurdle for potential investors, and I count myself among them. Like many investors, I have investable cash in my retirement accounts and plan to buy one or more MLPs. I welcome comments from others who have been investing in MLPs, particularly in regards to dealing with K-1s, using retirement accounts, and the UBIT issue.

Next Up: The REITs

Disclosure: I plan to buy one or more MLPs, but not within 72 hours.

Source: Dividend Champions: Focus on Master Limited Partnerships (MLPs)