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Kinder Morgan: Juicy Dividend And Steady Business (KMP)

 April 29, 2010 10:31 AM

If your goal is to generate income, you've spent a fair amount of time looking for dividend-paying stocks. It makes sense. There are plenty of solid companies on the market today with admirable histories of paying out dividends, and most investors have heard about these companies. We recently covered one of them (3M) (MMM), but another type of stock offers perhaps the best and most reliable dividends on Wall Street: Master Limited Partnerships or "MLPs."

MLPs are usually involved in the energy business, but they typically won't whipsaw your portfolio with every price move in the commodities market. Most MLPs are involved in the transportation of oil and natural gas through pipelines owned by the partnership. Regardless of the price of oil, it still needs to move from Point A to Point B. This allows MLPs to execute one of the most predictable business plans around.

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There are plenty of MLPs on the market today. One of the best is Kinder Morgan Energy Partners, LP (KMP), the second-largest publicly traded MLP by market value. Houston-based Kinder Morgan operates 14,300 miles of natural gas pipelines, over 1,500 miles of oil pipelines, and holds a stake in another 1,700-mile oil pipeline. Those statistics highlight the company's business – but what you really want to know about is Kinder Morgan's robust yield.

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Earlier this month Kinder Morgan raised its first-quarter distribution by 2% to $1.07 per unit – or $4.28 on an annual basis. Stocks like Coca-Cola (KO), Johnson & Johnson (JNJ) and Procter & Gamble (PG) are often considered "good" dividend earners, but not one pays anything like Kinder Morgan.

The current distribution rate gives Kinder Morgan a yield of around 6.3%. Does this mean it is riskier? The question is fair. Conservative investors want to be able to hold their income stocks for an extended period without worrying about capital loss – but they also like capital gains. Kinder Morgan delivers. Over the past five years, while the Dow Jones Industrial Average was up 10% and the S&P 500 rose just 7%, Kinder Morgan jumped more than 40%.

Kinder Morgan also has the advantage of size. As one of the largest, most liquid MLP issues, KMP is in the portfolio of just about every investor who wants exposure to this niche. That's why it is one of the top holdings in MLP exchange-traded products like JPMorgan Alerian MLP Index ETN (AMJ) and Credit Suisse Cushing 30 MLP Index ETN (MLPN). This gives KMP a natural base of support.

Kinder Morgan is forecasting a per-unit distribution of $4.40 this year compared with $4.20 last year. This means another distribution increase is probably on the way. Distributable cash flow in the first quarter jumped 36% from the year earlier period, so to say this dividend is safe may be an understatement. The power of income cannot be understated. That alone makes Kinder Morgan worth a look. To go with a solid, dividend-paying energy infrastructure MLP, go with Kinder Morgan (KMP).

Disclosure covering writer, editor, publisher, and affiliates: Long AMJ. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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