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Dividend investors can find excellent dividend stocks in high yielding master limited partnerships. The best companies increase their distributions year over year. My focus is to identify the best run companies that offer rewards in excess of risks. The article's data supports 2 companies have are 'must own' companies due to past performance and will also identify 3 companies to avoid based upon valuation and corporate structure.

Kinder Morgan, Inc. (NYSE:KMI)

Overview: Kinder Morgan, Inc. (KMI) is primarily a midstream fee based energy services provider. Kinder Morgan directly or indirectly owns or operates thirty seven thousand miles of pipelines for the transport of refined petroleum , natural gas, refined petroleum products, crude oil, carbon dioxide (CO2) and related liquid and gas products; 180 storage and processing terminals for various fuels, gases and chemicals; and natural gas supply pipelines and storage facilities for NGPL PipeCo LLC, in which Kinder Morgan has a 20% equity stake.

Kinder Morgan is North America's leading supplier of carbon dioxide gas for oil extraction, the largest independent transporter of petroleum and natural gas products, and the largest independent terminal operator.

Business Strategy: Kinder Morgan is squarely focused on expanding its position as North America's leading midstream energy pipelines and terminals operator, through capital investments, partnerships with major energy companies and strategic acquisitions. For example, in 2011, Kinder Morgan partnered with Valero Energy (NYSE:VLO) to build and operate a new 136-mile interstate pipeline. In addition, Kinder Morgan is strengthening its carbon dioxide leadership position through the acquisition of CO2 production fields and processing facilities. Kinder Morgan currently has hundreds of millions of dollars invested in various infrastructure and exploration projects.

Financials: For its fiscal year ended December 31, 2011, Kinder Morgan recorded total revenue of $8.26 billion from natural gas sales (40% of revenue), services (38%) and other products (22%). Revenue was marginally higher than $8.2 billion in 2010. Kinder Morgan's 2011 operating income of $1.54 billion was 20% higher than 2010. Its 2011 net income was $594.4 million, up from a loss of $41.3 million in 2010, primarily because Kinder Morgan's earnings are strongly impacted by annual fluctuations in equity investment returns and changes in non controlling equity interests. Kinder Morgan's reported earnings per share was 68 cents for Class A units.

Kinder Morgan generated $2.36 billion in cash from operations and reported cash holdings of $411.4 million, total assets of $30.72 billion, long term debt of $14.36 billion and stockholders' equity of $8.57 billion.

Distributions: For 2011, Kinder Morgan paid $1.05 in distributions per common unit, with distribution raised from 30 cents in Q3 to 31 cents in Q4. Kinder Morgan debuted as a public company in February 2011 and has a limited distribution paying record but management plans to raise distributions by 11.7% in 2012. At 31 cents quarterly, it has a distribution yield of 3.8% as February 24, 2012.

Units: Since its initial public offering in February 2011, Kinder Morgan units have fluctuated between $23.51 and $34.25. As of February 24th, 2012, units were near all time highs giving Kinder Morgan a market capitalization of $23.5 billion (2.7x Book Value) and a price to earnings ratio of 39.6x.

Kinder Morgan Energy Partners (NYSE:KMP)

Kinder Morgan Energy is the same as Kinder Morgan Management except for one key point. Kinder Morgan Energy pays distributions in cash. Kinder Morgan Management pays shares in lieu of cash.

Kinder Morgan owns 9% of Kinder Morgan Energy. The remaining 91% are in the pubic float. Kinder Morgan, the General Partner interest, receives incentive distributions from Kinder Morgan Energy.

Kinder Morgan Management, LLC (NYSE:KMR)

Kinder Morgan Management has the third highest cost of capital to fund new projects. Please see the table discussed below in the MarkWest table. This means explicitly that the company has a high cost of capital to fund any new acquisitions.

Kinder Morgan Management owns interests in Kinder Morgan Energy Partners. Kinder Morgan Energy Partners operates as a pipeline transportation and energy storage company. Kinder Morgan Energy owns an interest in approximately twenty nine thousand miles of pipelines and about 180 terminals.

Kinder Morgan owns 14% of Kinder Morgan Management. The remaining 86% are in the public float. Kinder Morgan Management is equal, pari passu, to Kinder Morgan Energy. Kinder Morgan Management dividends are paid in the form of shares instead of cash dividends.

Kinder Morgan, the General Partner interest, receives incentive distributions from Kinder Morgan Energy. Kinder Morgan Energy and Kinder Morgan Management are equal so incentive distribution rights are provided to the General Partner.

Peer Group: Kinder Morgan is by far one of the largest providers in its space. Its peer group includes Enterprise Products Partners (NYSE:EPD), and MarkWest Energy Partners, (NYSE:MWE). Kinder Morgan's distribution is currently under its peer group median of 4.9%.

Enterprise Products Partners (EPD)

Enterprise Products Partners has an extensive array of midstream assets. These operations include fifty thousand miles of natural gas, natural gas liquids, and petrochemical pipelines. Midstream operations also include natural gas storage, natural gas processing, marine functions, fractionation services, natural gas import and export terminals and offshore platforms.

Unit performance: Enterprise Products has increased their quarterly distribution for thirty consecutive quarters. Unit holders have been rewarded with a year in and year out solid returns. Per the above table, the partnership has been the SP500 by an average of 16.6% each year for the past 5 years.

Enterprise Products received a credit upgrade on January 31st from the major credit rating agencies. The company has plenty of growth prospects on its drawing board, which will require funding. The company has started the process of building the Seaway Crude Pipeline. The Seaway Pipeline will be reversed to carry oil from Cushing, Oklahoma to the Gulf Coast refineries near Houston, Texas.

Action: I recommend investors buy units in Enterprise Products Partners at a $45 - $47 price range. My personal belief is to use hedges to mitigate losses.

MarkWest Energy Partners (MWE)

MarkWest Energy Partners has extensive midstream operations. The company's midstream operations include the gathering, processing, and transportation of natural gas and crude oil,fractionation, storage and marketing of natural gas liquids.

MarkWest increased their fourth quarter, 2011, distribution by 16.9% compared to the fourther quarter of 2010. The growth projects provide catalysts for the distributions to continue to expand.

Action: I recommend investors purchase MarkWest units at the $55 price range. My personal belief is to hedge positions to mitigate capital losses.

Summary

Kinder Morgan is a dominant and stable midstream energy services provider with active investments to expand its portfolio. Kinder Morgan also targets large acquisitions as part of its growth strategy and premiums paid may not always be in Kinder Morgan unitholders' best interests. Shares are currently at all time highs, distributions are below its peer group median and even the announced 11.7% distribution increase for 2012 will fall short of peer group members.

I am often asked why Kinder Morgan's motto is "Companies Run By Shareholders, For Shareholders". The question pertains to why Kinder Morgan retains incentive distribution rights when its peers, Enterprise Products Partners and MarkWest, have eliminated the incentive distribution rights.

If you follow the incentive distribution rights (page 19 of the February 7th presentation) and money flow, Richard Kinder and original investors own 39% of Kinder Morgan. Sponsors such as Goldman Sachs own 45%. The public owns 16%. Dear reader, please follow the money and not the words.

Action

I recommend investors avoid the Kinder Morgan interests. Enterprise Products Partners and MarkWest offer outstanding returns without the incentive distribution rights that the Kinder Morgan General Partner is earning.

Source: 2 MLP Dividends To Buy, 3 To Avoid