MLPs for Everyone's Portfolio

I recently read a Kinder Morgan Energy Partner company PowerPoint slide show that presented some very interesting facts about the company. I think investments in structural energy companies like KMP that operate energy transport pipelines for natural gas, oil, CO2, etc. are a good instrument for portfolio diversification since they generate a lot of cash from existing operations and typically pay a hefty dividend.

The issue for most of us has been the fact that since you are buying in as a partner they you a K-1 every year and a lot of tax forms have to be sent in with your returns to the IRS. This may be a small price to pay given KMP's stellar 2009 performance while paying a 6% plus dividend. For those who prefer not to tick off their accountants, you can buy into the Kinder Morgan management company, ticker symbol KMR, and still get the performance and the dividends which are paid out as shares of stock so there are no forms to file with the IRS unless you sell and realize a capital gain. In essence, KMP is KMR without the paperwork requirements.

There are also a couple of Exchange Traded Notes (ETN) out there like UBS E-TRACS Alerian MLP Infrastructure ETN which give added diversification within this subsector. I am not, however, a huge fan of ETNs given their fairly high expense ratio and credit risk, i.e. if the issuer, e.g. Barclays, UBS, or JPM go out of business you could lose your entire investment.

The other compelling thing about KMR is that the shares are selling at a 15% discount to KMP. It is not often outside of a company stock option plan that you can buy shares of a company at a discount. I own shares of KMP and am considering purchasing KMR for my IRA since it does not have any UBTI (Unrelated Business Taxable Income) like KMP does which precludes holding KMP in an IRA because it could trigger a taxable event if more than $1000 is earned in any given year. Both KMP, which may be suitable for a taxable investment account, and KMR, if held in an IRA, are worth consideration to diversify a portfolio in today's volatile market.

As usual, this is not advice to buy KMP or KMR and no one should buy stock in any company without thoroughly researching the company's financial and forward looking statements and determine if it is a suitable investment considering their current portfolio allocation and tolerance for risk.