Brookfield Infrastructure for dividend investors

For those who understand the complications of MLPs, this energy company is a top choice.

By TheStockAdvisors Jun 19, 2013 10:42AM

Stocks circled in newspaper (© Digital Vision/Getty Images)By Chuck Carlson, DRIP Investor

The search for yield has pushed many investors into a number of investment "alternatives" to stocks. One popular investment alternative that has seen huge investor interest is Master Limited Partnerships (MLPs).

Because of its structure, an MLP does not pay income taxes. Rather, income, depreciation, and expenses are "passed through" to partners (i.e. unit holders) based on their ownership stakes. The unit holders, in turn, are responsible for their own tax reporting.

MLPs distribute the bulk of their cash flows to partners. Thus, yields tend to run well above those of common stocks, which is the major attraction of these investments.

However, high-yielding MLPs are not a free lunch:

  • MLPs are sensitive to interest-rate movements. Because of their high income streams, MLPs can behave similarly to fixed-income investments, falling in value when interest rates rise.

  • MLPs rely on credit. Many MLPs in capital-intensive sectors, such as energy distribution and storage, must access credit markets to fund expansion. If that access is impinged -- as happened during the 2008 credit meltdown -- MLPs could suffer. Indeed, many MLPs were roughed up badly during the 2008 market downturn.

  • MLPs are vulnerable to economic downturns. Economic weakness affects end-user demand for energy products, which impacts MLPs volume and revenue. That could lead to lower cash distributions.

  • MLPs' unique structure can create some tax headaches for investors. Because of their structure and nature of distributions, profits taxable at ordinary-income rates make up about 20% of the typical MLP's distribution, with the rest classified as return of capital. MLPs report tax information to limited partners via annual K-1 statements. If any of you have ever received a K-1, you know these are not the easiest documents to decipher come tax time.

Have these negatives kept investors away from MLPs? Not by a long shot. In fact, for the five-year period ending March 31, 2013, MLPs as a group produced total returns four times greater than the S&P 500 ($INX).

Among the MLPs that offer dividend reinvesment plans, my preference is Brookfield Infrastructure Partners LP (BIP).

I own these shares -- they were spun off to me by Brookfield Asset Management, a Canadian asset management company that I have owned for a number of years. Brookfield Infrastructure engages in the utilities, transportation, energy, and timber businesses.

The company operates a port facility in the United Kingdom, electricity transmission lines in North and South America, electricity and natural-gas connections in United Kingdom, New Zealand, and Columbia; and toll roads in Brazil and Chile.

The units yield 4.4%. The stock has performed well in line with the rest of the group but offers a nice play in the MLP space.

You must be a holder of Brookfield Infrastructure shares in order to enroll in the distribution reinvestment plan. U.S. investors may participate in the plan, which allows participants to have their cash distributions reinvested to buy additional shares.

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Jun 19, 2013 12:21PM
what isn't mentioned is the tax consequences of owning MLP's. the distributions are tax free. however the owner of the units is subject to additional tax reporting requirements. many throw of losses which aren't deductible until there is complete disposal of the units. tax basis goes down by the losses and distribution (as basis for stocks goes down for return of capital dividends) which results in a large gain.  upon total disposition all the cumulative losses that couldn't be deducted before are deductible.  however, a large part of the gain is recharacterized as ordinary income.  partial distribution - no deduction for the cumulative losses. , but still a large part of any gain becomes ordinary income
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