Doing The MLP Dividend Dance

By Aryeh Katz | May 20, 2009 AAA

As we've stated in this space before, master limited partnerships (MLPs) are not suitable for every investment portfolio. There are a number of important tax considerations to think of before deciding on the purchase of these high-yielding instruments. Yet, while most individual investors avoid holding them in taxable accounts altogether, there may be at least one method of circumventing the tax consequences of an MLP.
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A number of closed-end stock funds trade on the exchanges that hold MLPs exclusively. These closed-end-fund (CEF) MLPs get a different tax treatment than a regular MLP, and require different documentation at tax time. For instance, shareholders in these CEFs receive a Form 1099 rather than a Schedule K-1. At least part of the dividend should qualify for preferential tax treatment. Of course, it's best to check with your financial advisor before going ahead with a CEF MLP purchase; just keep in mind that you may have more options than you thought.

Pay Load
With that in mind, here are a few CEF MLPs that pay well and have looked very strong as of late.

The Cushing MLP Total Return Fund (NYSE:SRV) invests exclusively in energy MLPs and is currently paying shareholders about 14% to hold its stock. The shares have risen over 100% since bottoming in late December. Despite a rough investing environment, Cushing still managed to slightly raise its dividend in 2008. For the 2009 first quarter, however, management lowered the dividend.

The Fiduciary/Claymore MLP Opportunity Fund (NYSE:FMO) pays investors an annual dividend of 10.74% - a dividend, incidentally, that has grown every year since the fund's inception in 2005. FMO is up almost 75% since bottoming in October of last year at $8.03.

The Kayne Anderson MLP Investment Co. (NYSE:KYN) fund pays 9.81% annually, and the stock has appreciated by about 80% in just five months. Kayne Anderson has profited from a large gain in Plains All American Pipeline LP (NYSE:PAA), in which it has a very significant holding.

Slow and Steady
Tortoise Capital Advisors operate two funds worthy of mention, Tortoise Energy Capital Corporation (NYSE:TYY) and Tortoise Energy Infrastructure Corporation (NYSE:TYG), which pay annual dividends of 9.56% and 8.71% respectively (as of May 18). Year-to-date, the funds have appreciated an astonishing 34% and 48%, respectively. Here, too, management reduced the payout slightly for the first quarter, citing the need "to comply with coverage ratios under our leverage agreements and the Investment Company Act of 1940."

The Wrap
MLPs can be served straight up or stewed together in a closed-end fund. For those who desire active management of their MLPs, the above listed companies provide investors with tremendous opportunity. Just remember to check the tax implications with someone in the know first. (For further reading on MLPs, read our article: Discover Master Limited Partnerships.)

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