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Playing Energy LPs

NEW YORK ( TheStreet) -- Media reports on stock picking tend to point investors to names with significant short-term upside potential, but there's something to be said for steady names that feature outsized dividend yields.

Considering overall stock market performance over the past five years, an investment paying consistent dividends over 5% has beaten the performance of most well-known stock names.

An investor should of course consider their overall objective along with risk tolerance. If you hold an investment that produces steady income, don't reinvest dividends and avoid spending all the income. The result will be a continually replenishing war chest for new investments.

Seven of the ten names featured in TheStreet's 10 Top-Rated Dividend Stocks are not corporations, but are limited partnerships with publicly traded partnership units. LPs have some advantages for income-seeking investors, since larger amounts of income are "passed-through" to unit holders and are not "double-taxed" at the corporate level.

There are some complications to investing in a limited partnership including tax implications, since investors receive a Schedule K-1 form, which is handled differently from a 1099 Dividend form when a tax return is prepared. In addition to the dividends received, the K-1 will reflect an investor's portion of the company's expenses -- which is a tax advantage. However, they may also reflect a portion of the company's gains on investments, which will have negative tax complications.

Returning to the point that most media coverage focuses on "hitting home runs" and making killer stock picks, the energy LPs provide steady and hopefully-growing income and over the long haul. To keep things conservative, it makes sense to focus on companies with steady long-term track records of dividend payouts, and expect volatility.

For the stronger energy LPs, the price volatility of the partnership units doesn't affect your income, but can present golden opportunities to increase your holdings and "buy more income."

Take a look at Kinder Morgan Energy Partners (KPM). For starters, let me disclose that a family member holds KMP partnership units.

With that out of the way, the company's last quarterly dividend was $1.09 per unit, which translates to a yield of 6.33% based on Friday's closing price of $68.83. Not bad when considering that the average rate on a five-year CD last week was 1.77% according to BankingMyWay.
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