Boosting Returns Through MLP's

I wrote in an earlier post about my plan to boost dividend income in 2010 by increasing my investments in MLP's. I did some research and discovered 3 great prospects for investing:

1. Suburban Propane Partners (SPH) Principally engaged, through its operating partnership and subsidiaries, in the retail and wholesale marketing of propane and related appliances, parts and services. This company pays a dividend of $3.32, which represents a 7.7% yield on their recent price of $43.99 per share. The P/E is 8.7, return on equity is 57.4%, earnings per share are $5.93 (so their dividend should be sustainable) and they have over $4 per share in cash. This will be my first targeted investment.

2. Alliance Resource Partners (ARLP) Master limited partnership engaged in coal mining, principally in the Illinois Basin, with the balance split between Northern Appalachia and Central Appalachia. The company is managed by its general partner, Alliance Holdings G.P., who holds the incentive distribution rights to the partnership, as well as 42.5% of the partnership's limited partner interests. They have a dividend of $3.04 which represents a 7.8% return on their recent price of $38.80. Their return on equity is 67%, P/E of 12.10 and they have $2.50 per share in cash. Earnings per share is $3.23. This will be my second investment for the upcoming year.

3. Amerigas Partners (APU) A publicly traded limited partnership formed under Delaware law on November 2, 1994. The Company is a retail propane distributor in the United States. As of September 30, 2003, they served approximately 1.3 million residential, commercial, industrial, agricultural and motor fuel customers from approximately 650 district locations in 46 states. The Company also sells, installs and services propane appliances, including heating systems. In certain markets, the Company also installs and services propane fuel systems for motor vehicles. Their District locations consist of an office, appliance showroom, warehouse and service facilities, with one or more 18,000 to 30,000 gallon storage tanks on the premises. As part of its overall transportation and distribution infrastructure, the Company operates as an interstate carrier in 48 states throughout the United States. The Company is also licensed as a carrier in Canada. The Company sells propane to five markets: residential, commercial/industrial, motor fuel, agricultural and wholesale. Their Propane Xchange program enables consumers to exchange their empty 20-pound propane grill cylinders for filled cylinders at retail locations such as home centers, mass merchandisers and grocery and convenience stores. During fiscal year 2002, they introduced PPX Plus cylinders that are equipped with a special overfill protection device required by the National Fire Protection Association. They conduct their business through their subsidiary, AmeriGas Propane, L.P. and its subsidiary, AmeriGas Eagle Propane, L.P., both Delaware limited partnerships. The executive offices of the Company are located at Pennsylvania. As of October 1, 2003, AmeriGas OLP acquired all of the retail propane distribution assets and business of Horizon Propane LLC. AmeriGas Propane, Inc. is their general partner. The General Partner provides these services. Dividend of $2.68 which represents a 7.2% yield on their recent price of $3748 per share. Their P/E is 10.40 with a return on equity of 49% and $1.04 per share in cash.

I don't always agree with Jim Cramer over at CNBC, but he happens to like these companies as well. While I plan on investing in all 3 partnerships, I would suggest readers do their own research before making investments for themselves. However, if you're looking to invest in master limited partnerships, this might give you a good start.

Happy Thanksgiving!

It's hard to believe it's Thanksgiving already and before we know it Christmas and New Years Day will be here. So I'll take this opportunity to wish everyone a Happy Thanksgiving! I guess I'm most thankful for being back at work. While my new job leaves a lot to be desired, I'm thankful for having a job at all, when so many people are unemployed.

Looking ahead to the new year, I'm working on my investment plan. I've decided to take advantage of the capital gains on some of my stocks and retire the remaining debt on my credit cards. At the same time I plan to sell some of the underperforming stocks in my personal portfolio and divert the cash to more shares in master limited partnerships. This should reduce my tax liability in the coming years, while increasing average monthly cash flow from dividends. The increased cash flow and reduction in taxes, should more than make up for the loss of dividends from the stocks I'm selling to pay off old credit card debt. I'm only keeping 2 credit cards and using them very sparingly. Maybe one of these days the credit card companies will come to their senses and if not I'll simply avoid doing business with them.

Back in August I wrote about some of my investments in Master Limited Partnerships (see: http://thebluecollarinvestor.blogspot.com/2009/08/mlps-start-paying-off.html) and how they were beginning to pay off. I've been very pleased with their performance and look forward to earning even more going forward. I really love the idea of tax advantaged income outside of my IRA account.

For the new year, I'm also looking in to starting a new business or possibly purchasing a business in partnership with some of my family members or friends. I am aware of the risks involved in starting a business, but I'm also well aware of the potential rewards if the business is successful. No concrete plans yet, but I'm definitely interested in starting a business of my own.

November So Far

Well it's the first week of November, the stock market is down and I'm back to work. A little disappointed in the stock market, but it does allow me to pick up stocks at a cheaper price. Been having a little difficulty getting back into the work environment again, but I'm glad to have a job when so many people are out of work still. I ended up taking a much lower position with a lot less pay than at my last job, but work is work. I still recall the 1970's when so many people were unemployed for what seemed like forever. It was hard times then and any job you could get was considered a good job. Don't want to find myself in that position if I can avoid it.

This is a big month for dividends from my taxable portfolio. I'll be receiving payments from over 10 different companies and most of them are high yielding stocks. I'm beginning to like Canadian energy trusts with their monthly payouts and love the master limited partnerships!

My IRA is doing well. Just added more AT&T shares. A friend of mine was telling me a story about a former co-worker who ended up homeless and called him asking for help. He was stunned that the guy had no where to live, no money and no car, but he had a cell phone. That's why I love telecoms. They're not really in favor right now, so I'm picking up shares at bargain prices. When homeless people are carrying phones, you can't hardly go wrong owning telecom stocks.

MLP's Start Paying Off!!!

It's Friday noon and the stock market took a tumble on consumer sentiment reports, but I'm in a pretty good mood. I just got paid dividends from some of my investments in the master limited partnerships! What a deal! The payouts on those 4 are as follows:

Calumet Specialty Products CLMT--12.80%

Encore Energy Partners ENP--12.62%

EV Energy Partners EVEP--15.04%

Legacy Reserves LGCY--13.15%

What fantastic returns! When you consider the payouts and the tax advantages of investing in master limited partnerships, I think it will boost my returns significantly over the next few years. Recently,I also bought and sold Regency Energy Partners (RGNC) for a quick 24% gain. So I'm feeling pretty good about investing in limited partnerships.

Tax Advantages:

In an MLP, instead of paying a corporate income tax, the tax liability of the entity is passed on to its unitholders. Once a year, each investor receives a K-1 statement (similar to a 1099-DIV form) detailing his or her share of the partnership's net income, which is then taxed at the investor's individual tax rate.

One important distinction must be made here: While the MLP's income is passed through to its investors for tax purposes, the actual cash distributions made to unitholders have little to do with the firm's income. Instead, cash distributions are based on the MLP's distributable cash flow (DCF), similar to free cash flow (FCF). Unlike dividends, these distributions are not taxed when they are received; instead, they are considered reductions in the investment's cost basis and create a tax liability that is deferred until the MLP is sold.

Fortunately for investors, MLPs generally have much higher distributable cash flow than they have taxable income. This is a result of significant depreciation and other tax deductions, and is especially true of natural gas and oil pipeline and storage companies, which are the most common businesses to choose an MLP structure. Investors then receive higher cash payments than the amount upon which they are taxed, creating an efficient means of tax deferral. According to a report by Wachovia Securities, titled "Master Limited Partnerships: A Primer" (2003), the taxable income passed on to investors often is only 10-20% of the cash distribution, while the other 80-90% is deemed a return of capital and subtracted from the original cost basis of the initial investment.

Read More About MLP's at:

http://www.investopedia.com/articles/basics/07/ml_partnerships.asp

MARKWEST ENERGY PARTNERS, L.P.

I mentioned in yesterday's post, my plan to invest this week in MWE a master limited partnership. MarkWest Energy Partners, L.P. is a publicly traded Delaware limited partnership, which was formed on January 25, 2002. The Company is engaged in the gathering, compressing, treating, processing and transportation of natural gas the transportation, fractionation, storage, and marketing of NGLs and the gathering and transportation of crude oil.

It conducts its operations in three geographical operating segments: the Southwest, the Northeast, and the Gulf Coast. Its East Texas system consists of natural gas gathering pipelines, centralized compressor stations, a natural gas processing facility and an NGL pipeline. The East Texas system is located in Panola, Harrison and Rusk Counties and services the Carthage Field. Producing formations in Panola County consist of the Cotton Valley, Pettit and Travis Peak formations, which collectively form one of the largest natural gas producing regions in the United States. The Company owns the Foss Lake natural gas gathering system and the Arapaho I and II natural gas processing plants, all located in Roger Mills, Custer and Ellis Counties of Western Oklahoma. The gathering portion consists of a pipeline system that is connected to natural gas wells and associated compression facilities. It also owns the Grimes gathering system, which is located in Roger Mills and Beckham Counties in Western Oklahoma. In addition, it owns a natural gas gathering system in the Woodford Shale play in the Arkoma Basin of Southeast Oklahoma. The Company owns a number of natural gas-gathering systems located in Texas, Louisiana, Mississippi and New Mexico, including the Appleby gathering system in the City and County of Nacogdoches, Texas. It gathers a portion of the gas produced from fields adjacent to its gathering systems. The Company is a processor of natural gas in the Appalachian Basin, with fully integrated processing, fractionation, storage and marketing operations. Its Appalachian assets include the Kenova, Boldman, Cobb and Kermit natural gas processing plants, an NGL pipeline, the Siloam NGL fractionation plant and two caverns for storing propane. The Company owns and operates a crude oil pipeline in Michigan. The Michigan Crude Pipeline is subject to regulation by the Federal Energy Regulatory Commission. It also owns a natural gas gathering system in Michigan. The Company owns and operates the Javelina Processing Facility, a natural gas processing facility in Corpus Christi, Texas, which treats and processes off-gas from six local refineries. The facility processes approximately 120 to 130 MMcf/d of inlet gas out of its 142 MMcf/d capacity.

In each of its operating segments, the Company faces competition for natural gas and crude oil transportation and in obtaining natural gas supplies for its processing and related services operations in obtaining unprocessed NGLs for fractionation and in marketing its products and services. Competition for natural gas supplies is based on the location of gas-gathering facilities and gas-processing plants, operating efficiency and reliability, and the ability to obtain a satisfactory price for products recovered. The Company's business is subject to federal, state and local laws and regulations with respect to environmental, safety and other regulatory matters.

MWE currently pays a dividend of $2.56 per share which represents a yield of 11.97% on their recent share price of $21.38. Recently I discovered the tax advantages in owning MLP units, which makes them even more appealing. The way I understand it, the IRS considers 80 to 90% of payouts from master limited partnerships as return of equity, and unit holders are taxed at their regular tax rate on 10 to 20% of payments received. Because of their special tax treatment, they are more appropriate for taxable investment accounts.