There are a few reasons why some investors shy away from Master Limited Partnerships (MLPs). Income from MLPs is taxable in retirement accounts if the unrelated business taxable income (UBTI) exceeds $1000. Also, cash distributions from MLPs are treated differently for tax purposes in standard accounts. MLP investors receive a form K-1, which is sent later than 1099 forms. In some cases, investors receive Schedule K-1 after April 15, forcing them to file for an extension. Furthermore, an MLP's cash distributions are taxed at ordinary income rates, rather than the 15% dividend rate. To avoid these hassles, investors may want to consider owning Kinder Morgan, Inc. (KMI).
KMI is the incorporated parent company of the Kinder Morgan entities and trades as a corporation, not an MLP. The company operates the following subsidiaries: Kinder Morgan Energy Partners L.P (KMP), Kinder Morgan Management, LLC (KMR), and El Paso Pipeline Partners, L.P. (EPB).
Investors of KMI can reap the benefits of its 4% dividend. The subsidiary, KMP pays a dividend of 6%, but operates as an MLP, so investors can weigh whether the extra 2% is worth the tax implications.
Kinder Morgan is the largest midstream and third largest energy company in North America (based on combined enterprise value). The beauty of the business is that it operates like a toll taker, as it collects fees from major oil companies, energy producers, and similar businesses.
The fees are collected for the use of KMI's 75,000 miles of pipelines and 180 terminals. KMI pipelines transport oil, natural gas, refined petroleum products, carbon dioxide, and more. The company also stores gasoline, jet fuel, coal, petroleum coke, and steel.
The company has little commodity price risk as its fees are not directly tied to the price of the commodities being stored or transported.
KMI is expected to grow earnings annually at 26.7% for the next five years. If this growth is achieved, it should be a significant catalyst for the stock. Although KMI is expecting negative earnings growth for this year, it is expecting 63% earnings growth for next year. The company's earnings growth for the next five years should propel the stock to double the market's performance, while it pays a generous dividend.
KMI has been growing through expansion and acquisitions. The acquisition of El Paso Corporation was the most recent major addition to the company. This strategy should be the growth catalyst for the future. By finding new productive sources of revenue and earnings, KMI's acquisitions will strengthen the company and provide value for shareholders.
Overall, the company looks like a good combination of dividends and stock growth without those pesky MLP tax implications.