To MLP or Not to MLP …..

” I spent hours trying to figure out what was wrong but never did find the errors. “

That is the question !

First – What is a MLP?

A MLP is an acronym for Master Limited Partnership. Basically it’s a tax structure allowed that passes income to the shareholders (Called Unit Holders) through Dividends ( Called Distributions). MLP’s are popular because they are known for paying very high dividend yields.

They are not very friendly when held in Tax Deferred accounts because if you sell them or special situations occur it can generate taxable income even within a tax deferred account. And it can also be a complete pain. So most people own them in taxable accounts but even there they can be a real pain. For the most part you will find them in the Oil and Gas related companies, although there are a few in other industries. One that comes to mind is Stonemor (STON)  which is in the funeral and burial industry.  They have tax advantages also and like I said above they can pay really great Dividends (Distributions).

They are usually set up in complicated owner structures that help to serve and protect the main company. You can have a general partner with several limited partnerships operating below it. I have found that they are easily manipulated and merged between partnerships so as to serve the majority owners at the cost of the common shareholders (unit holders). They can easily dilute the shares, lower the distributions and a host of other moves that are not friendly to unit holders. MLPs are also notorious for reducing distributions or cutting them completely with no warning.

Because of the High yields (distributions) many are willing to accept this. Perhaps the biggest headache though is trying to do your taxes, especially for people like me that does his own. I had about 20 MLPs to enter this year. Each company issues a K-1 statement which is a tax form that must be reported in your tax paperwork. The first problem is they can arrive a late as a couple of weeks before your taxes are due putting you under a lot of pressure to finish your taxes before the tax due date. Now, I understand that you can file extensions but if you expect to owe tax then you have to pay an estimated tax payment when you file the extension which can also complicate matters. I enjoy doing my own taxes and utilize the Turbo Tax software to doing it, which makes things really easy. Normally it takes maybe an hour for me to complete my taxes. This year was different. I spent about three hours a day for five days trying to enter all the complicated information. And some of the MLP’s operated with other MLPs so basically I had to enter the information three times for a single company. For some reason there was a couple of companies that the Turbo Tax software kept rejecting as errors for me to correct before filing. I spent hours trying to figure out what was wrong  but never did find the errors. I don’t know if it was a glitch in the software or what but it drove me crazy.

This week comes the announcement of a MLP I owned cutting its distributions. This was the second time it had cut them this year year. For me, that was the last straw ! I sold all my MLPs that day. I had had enough! The sad thing is I will still have to deal with all those K-1’s again next year when I do my taxes but for now it gave me some satisfaction to have rid myself of them.

 

Thoughts or comments are welcome. Please consider following me if you like reading my posts !

 

 

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Why I became a Dividend Income Investor

When my wife died I realized I still had two minor children living at home

My main personal motivation  for becoming a Dividend Income investor was the death of my wife. When my wife died I realized I still had two minor children living at home that I now had the sole responsibility for. I had two other children that were grown and married with good jobs so I knew they would be okay but what about the two minor children? I wanted to ensure my two youngest children were provided for. Reviewing my Investments I realized that even with leaving my two youngest children the entire Insurance policy I had would not be enough to support them for more than a could make it for a minimum of six years financially to ensure their well being. So this is when I switched couple of years. My youngest child was 14 years old at the time so my thought was that I needed to ensure they I sold most stock that was paying dividends below a 5% yield. My main focus became providing enough income for them to live on should anything happen to me. This meant sticking my investing neck out and taking on some risks that I hadn’t been willing to do.  I increased my average yield from less than 4% to right at 10%! Now I know what many will say – Why be so risky buying higher yield stocks when everyone says they are “Yield Traps” or “very risky”.

Amazingly what I discovered was that my new way of investing was not any more risky than my previous “safe” style yet I was bringing in right at three times the amount of monthly income. Since I was not in need of the extra income it was being reinvested into even more stocks. In other words my income was now compounding about 2 times faster than it was previously and it did not take me very long at all to make sure that my monthly income goals of providing for my children were met.

Did I have any failures? Sure, a couple of stocks that I purchased cut their dividends but I simply sold them and bought other stocks that were paying similar , if not more in Dividends than the stocks that I was replacing. A few stocks, I kept in spite of the dividend cuts. An example is a stock that I purchased during the oil bust. I remember one in particular was paying over 30% in dividend yield and after the cut I was still receiving a yield in excess of 15% so I decided to keep it. My reasoning was that a 15% yield is great by any measure, and that the company having reduced its dividend was in much better shape financially. Of course by practicing “risk mitigation” (see chapter —-) I had not put an excessive amount of my investment money at risk, even if I had lost every penny of that stock. I am now near three years into my new style of Investing so I am sure you would ask , do I regret switching to my new style of investing that I call Dividend Income Investing? The answer is absolutely not.

My Dividend income has increased almost every single month. Now of course you have to be smart and selective and make sure not to get too greedy with the yields. A portfolio yielding 8-10 % is quite doable. One of the first things you have to look at is the yield out of whack with the Sector it is in. Many stocks like MLPs, REITs and BDCs naturally pay out more in Dividends and Distributions. This is so because they are either passing on taxes to you, or because they are required to pay out distributions as a percentage of their Revenue. The other very important step is to do a little (or better a lot) of research to make sure the company is on solid ground and is not in danger of going bankrupt or drastically cutting its dividend. You don’t have to be an expert in the Charts and financials of each company, much of which is very confusing to the average investor but I have found a great way to research companies is to read every single article you can find before investing.  I even like to read the comment sections below the articles to see if the average Joe agrees with the author’s conclusions. Once I have determined the company as a safe investment then I act upon it.

The amazing thing is my portfolio generates much more than it would otherwise and with the extra dividends I can purchase even more stock which helps to make the Portfolio safer each and every month as well as grow in value!

Now I am not an Financial Advisor, so I can’t say my method will work for you, but what  I can say it has worked very well for me.

Please feel free to share your comments below, I look forward to hearing what you think.