What I'm going to present here is a simple way for Kinder Morgan Energy Partners' (KMP) shareholders to improve their position, get a bit more yield and, over time, compound that yield faster.
The idea is not complex. Simply switch from KMP to Kinder Morgan Management LLC (KMR). KMR is the same as KMP. It's simply a class that pays the dividend in shares instead of cash. This means two things:
One is that you'll only get taxed when you sell the additional shares, so you can time your taxes;
And two is that the dividend is automatically reinvested, without the burden of taxes, so it compounds faster than it would if you reinvested the cash dividend.
The advantages don't stop there, though. KMR trades at a substantial discount to KMP, so by switching you'll have a substantially lower cost basis. As I am writing this, KMP is at $81.21 and KMR trades at $72.40, there's an almost 11% discount to be had. And obviously, since the distributions are the same and the cost basis can be 11% lower, the yield is also higher on KMR.
Don't believe me?
You don't have to take my word on it. Here's what Kinder Morgan's president, C. Park Shaper, had to say to Seeking Alpha, in a recent interview:
LM - Many investors get confused between KMP, KMR and KMI - could you help them handicap the key features and different growth prospects between the three?
PS - I'll refer you to our presentation for full details, but here's a short version:
First of all, KMR is KMP:
- KMR shares are pari passu with KMP units
- KMR dividend is equal to KMP cash distribution, but is paid in additional shares; effectively as a dividend reinvestment program
- Like KMP units, KMR shares are tax efficient - but with simplified tax reporting (no K-1s, UBTI)
SL- Is there any reason for KMR to trade at a discount to KMP - shouldn't they trade at the same value?
PS - I believe they should trade at the same price as one another, and in truth, KMR has the added advantage of allowing you to control when you pay your taxes: There are no current taxes due unless you sell your shares. In fact, I think there is a legitimate argument that KMR shares should trade at a premium.
Now, so why does it trade at a discount? I don't know - It's a great mystery. I think it's an opportunity as well that will prove to be very rewarding for KMR holders, because I don't believe there is any fundamental reason for the discount. And while they benefit from the earnings and even higher yield, and ultimately if that discount goes away, then they will have picked up that value.
SL - So those KMR distributions that are reinvested back in, they're not taxable when they're made and they're only taxable when you sell?
PS - That's right. And so you're getting additional KMR shares every quarter, and it's like a stock dividend. So you pay no current taxes, and in truth it's even more efficient than that. Once you get a year past your original purchase, then every share that you sell, even if it's a share that you just received in a dividend; every share that you sell is long-term capital gains.
There's an obvious opportunity in the market to increase the yield, lower the cost basis and reinvest dividends more efficiently for KMP shareholders. It's as simple as selling KMP and buying KMR instead.