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3 Master Limited Partnerships for Your Dividend Portfolio

By Justin Loiseau – Feb 15, 2014 at 1:00PM

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What is a master limited partnership? Your answer to a profitable dividend stock portfolio.

Master limited partnerships, or MLPs, are just like normal dividend stocks. On steroids. Without taxes. While 2013 was a record year for master limited partnerships, there's plenty of reason to believe 2014 could be even better. Here are three new MLP picks for your dividend stock portfolio.

Master Limited Partnerships 101
MLPs are no ordinary stocks. Although they're publicly traded companies, they meet certain regulatory requirements that allow them to qualify for two words every person in the world wants to hear: lower taxes.

MLPs have been around since 1981, and Uncle Sam has given them a tax break for the past 33 years to spur on investment. To gain MLP status, companies need two things: (1) at least 90% of sales to come from real estate, natural resources, or commodities, and (2) a partner.

While the partner provides the capital, MLPs push cash back straight back to partners before it's taxed at a normal rate. That means more growth potential with bigger distributions. Here are three MLPs you should keep a close watch on.

1. Spectra Energy Partners

Source: Spectra Energy.

Some MLPs keep everything public. Spectra Energy (SE) created MLP Spectra Energy Partners (SEP) soon after it was spun off itself from Duke Energy in 2007. Duke spun off Spectra Energy to divest its natural gas assets and focus on electricity generation, and Spectra Energy subsequently spun off MLP Spectra Energy Partners to take advantage of taxless pipeline and storage assets.

While some would question whether Duke Energy should've hung on to its natural gas assets, few would argue that Spectra Energy's MLP creation was anything but a sweet deal for both companies. Spectra Energy still owns 84% of Spectra Energy Partners and continually provides capital investments in return for income distributions.

When Spectra Energy announced last June that it would finish up its full drop-down of U.S. transmission, storage, and liquid assets by the end of 2013. Both shares shot up. That's MLP magic.

SE Chart

SE data by YCharts

2. Kinder Morgan Energy Partners

Source: Kinder Morgan.

Kinder Morgan (KMI -0.78%) and Kinder Morgan Energy Partners (NYSE: KMP) are another dynamic duo energy investors have been keeping their eye on. While stock prices soared from 2011 through last summer, shares of both companies have headed into the red in the past year.

KMI Chart

KMI data by YCharts

MLP status alone is no key to success, and investors sold off shares amid worries of overvaluation and overextension. Research firm Hedgeye Risk Management's accusation that Kinder Morgan and Kinder Morgan Energy Partners may be shirking maintenance to put cash back in shareholders' pockets knocked 8% off shares in a single day.

But long-term investors may still find reason to love this MLP and its big brother. Kinder Morgan Energy Partners offers a sweet 6.8% dividend yield, and proponents believe that several new investment opportunities, including an increased focus on energy rail transport, should push this stock back into the black.

3. Icahn Enterprises

Source: Wikimedia Commons, Jeff Kubina. Icahn Enterprises, L.P. owns 7,121 slot machines.

MLPs don't always have to have a public partner. Activist investor Carl Icahn has an MLP of his own: Icahn Enterprises (IEP -0.51%). Whereas Spectra Energy Partners and Kinder Morgan Energy Partners gained MLP status from their energy assets, Icahn Enterprises focuses more on real estate and commodities. The MLP boasts an astonishing amount of diversity, with investments as varied as slot machines, meat packaging cases, railcar repairs, golf resorts, duvet covers, and metal collection.

If that sounds like a crazy investment scheme, consider the fact that half of Carl Icahn's entire net worth is invested in Icahn Enterprises -- which turned out pretty well in 2013, considering its stock soared a mind-blowing 128.9% in 2013.

IEP Chart

IEP data by YCharts

Why should you own master limited partnerships?
All three of these MLPs offer significant upside with stable sales. Their partners enjoy their profit, but given their public status, individual investors don't have to head through a middle man. MLPs aren't perfect, and an investment for your dividend portfolio requires the same due diligence as any other stock. But with a beautiful business model and rocking regulation, master limited partnerships are an excellent dividend stock option.

Justin Loiseau has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan and Spectra Energy and owns shares of Kinder Morgan. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Spectra Energy Corp. Stock Quote
Spectra Energy Corp.
Kinder Morgan Stock Quote
Kinder Morgan
$19.00 (-0.78%) $0.15
Icahn Enterprises Stock Quote
Icahn Enterprises
$50.57 (-0.51%) $0.26
Spectra Energy Partners Stock Quote
Spectra Energy Partners

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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