Produce Income With High Yield Dividends, Pipeline Master Limited Partnerships MLP.

Produce Income With High Yield Pipeline Master Limited Partnerships MLP

also known as MLP’s…Master limited partnership (MLP) is a limited partnership that is publicly traded on a securities exchange. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities.

 

Example of a MLP = KMP

Kinder Morgan Energy Partners (KMP) is a $29.43 billion large-cap MLP with a 5.3% dividend yield. It has 38,000 miles of pipelines and about 180 terminals.

KMP is fairly valued as it trades at 4 times net asset value per unit. For 4th-quarter 2011, it had $243 million available for dividend payments, of which $212 million were paid as dividends. Distributable cash flow was up 16% for the quarter and up 12% for the year.

KMP has a number of projects that it is pursuing for expansion purposes. It is spending over $450 million on its Product Pipeline segment for the following projects: to connect the Eagle Ford Shale play to the Houston Ship Channel; to build a condensate processing facility at its Galena Park facility; to upgrade existing pipelines; and to build 7 tanks for its Carson, CA terminal.

KMP is also spending $410 million on its natural gas segment. It spent $155 million on the acquisition of SouthTex Treaters, which provides natural gas treating plants for the removal of CO2 and H2S from the pipelines. It also has a $255 million project to increase its Doe Canyon production by 62%.

*Note here: This is just an example of a MLP…I am not endorsing KMP as of yet..jp

 

Energy MLPs are defined as owning energy infrastructure in the U.S., including pipelines, natural gas, gasoline, oil, storage, terminals, and processing plants. They are integral to run the energy infrastructure to the U.S., therefore providing a very basic, stable business, which have consistently performed for investors.

Those investors who are looking for high dividend yields should consider pipeline master limited partnerships (MLPs). Over the last ten years, MLPs have been the best performing asset class in the world. MLPs have grown from $30 billion invested in 2003 to $250 billion invested today.

 

Pipeline MLPs are attractive in my opinion because they act as fee collectors in the energy business. This gives them the advantage of being independent of the fluctuations in oil and natural gas prices.

Since they are the transporters of fuel, the price of the fuel itself doesn’t matter, since they collect fees for transporting it through their pipelines. I see them as similar to the credit card companies that collect fees every time the cards are used, but are immune from credit default as the issuing banks take on that risk.

Since 2003, MLPs as an asset class have grown from $30bn in investment to $250bn today, and have also been the best performing asset class in the world over the last 10, 5, and 3 year periods. The recent finding of gas and oil in the United States and future growth of shale drilling should lead to the continued success for MLPs.

Because MLPs are a partnership, they avoid the corporate income tax, on both a state and federal basis. Additionally, the limited partner (investor) may also record a pro-rated share of the MLP’s depreciation on his or her own tax forms to reduce liability. This is the primary benefit of MLPs and gives MLPs relatively cheap funding costs.

Investors looking for income in the form of high yield should consider the pipeline MLPs as a portion of their portfolio. I would pick one that is both undervalued and increases its distributions regularly. This would include: BWP, EEP, and NS.

I like the pipeline companies because they are not levered to the price of oil or natural gas. They merely act as mid-stream fee collectors as they transport oil and gas from point A to point B. This immunity from the price of oil and gas has a strong appeal to income producing investors who don’t want their investments fluctuating with commodity prices.

I found six pipeline MLPs with high dividend yields that we’ll explore to determine if they are investment worthy..stay tuned for part 2 on this subject soon…jp

Source: http://seekingalpha.com and http://en.wikipedia.org/wiki/Master_limited_partnership


Produce Income With High Yield Dividends, Pipeline Master Limited Partnerships MLP.
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