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Energy Holdings With Juice

If you don't know much about dividends because you've been a growth-stock investor all your life, here's some math to help you understand why they're so cool. It's like a pre-algebra word problem:

  • According to government statistics, the average person drives 12,200 miles a year in a vehicle that gets 21 miles to the gallon.
  • According to energy industry statistics, the average price of a gallon of gasoline nationwide over the past year was $2.50.
  • Divide 12,200 by 21, and you'll see the average person uses about 580 gallons of gas annually. Multiply that by $2.50, and you'll see the average person spends about $1,450 per year for gasoline.
  • So how much money do you need to put into an investment that yields 6% per year to get $1,450 in annual income? I'll spare you the rest of the equations, but the answer is about $24,000.

If you put about $24,000 of your investment portfolio into a set of MLPs, they'll throw off enough income to pay for an entire year's worth of gasoline.

Though that's pretty awesome by itself, where it really gets interesting is that MLPs have done a great job of providing capital appreciation as well. In fact, since 2000, an index that tracks these securities, called the Alerian MLP Index, is up 240%.

One of the largest companies in the group, Enterprise Products Partners (EPD), is up 330% over that span, while another company, MarkWest Hydrocarbon (MWP), is up more than 1,100%.

Picking Up the Slack

MLPs are an invention of mid-1980s federal tax policy designed to encourage investment in "midstream" energy assets. The companies in the sectors are primarily involved in the gathering, transportation and storage of crude oil, natural gas, coal and refined products, such as fuel oil and natural-gas liquids. They own the pipelines, storage tanks, terminals and tankers that move energy from the place where it is sucked out of the earth to the places where it is processed and used.

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