NEW YORK (
) -- 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
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
But the story gets better, since the price of the KMP units has increased 36% over the past year and the dividend has increased twice over the past year and 37 times since current management took over in February of 1997. For an investor who went in on Sep. 24, 2009 at the closing price of $50.36, the yield on those units based on the most recent distribution would be 8.66%.
This is, of course, a rosy example, but it brings some focus to another kind of growth - the growth of investment income. If you keep building up investments in conservative names with high dividend payouts or distributions on partnership units and don't reinvest, your sweep account keeps growing and you can periodically make new investments or add to old ones on dips. Looking for an investment home for your growing cash hoard is a nice problem to have.
The highest-yielding investment among
Enbridge Energy Partners
. Based on the most recent quarterly distribution of $1.028, the yield at Friday's closing price of $55.10 was 7.46%.
The third energy LP featured among the >
Magellan Midstream Partners
. The quarterly distribution is 73.3 cents and based on Friday's closing price of $50.70 the units yield 5.78%.
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.