Editor’s Note: Folks are getting nervous that the Fed may be about to hike rates.
After all, it has already met its original inflation target of 2%. It has also already met its original unemployment rate target of 6.5%.
In today’s Weekend Edition, Bonner & Partners income analyst Jim Nelson reveals why this means big changes in one highly profitable income-investment vehicle.
He also reveals the unusual strategy he reckons is the single best way to boost your income today…
The Safest Source of High Income You Can Find Today
By Jim Nelson, editor, Bonner & Partners Platinum
Everyone has an opinion on what will happen when the Fed finally raises rates.
Will stocks shrug it off?
Will they crash?
You can make an educated guess. But the truth is it’s impossible to know.
What we do know is that the mere threat of rising rates is already having a profound impact in one unusual, but highly profitable, income-investing vehicle…
If you’ve been following the news, you’ve probably heard of the $44-billion deal to consolidate the Kinder Morgan family of companies.
Kinder Morgan is the fourth largest energy company in North America. But it isn’t an explorer, driller, drilling-services company or producer. Instead, it owns interest in or operates about 80,000 miles of oil and gas pipelines. Think of it as a giant “toll road” that picks up fees for the use of its pipelines from energy producers and shippers.
But Kinder Morgan is also known for pioneering the master limited partnership – or MLP – structure… or at least what modern day MLPs look like.
That’s because they have been one of the best performing sectors in the market. As you can see, MLPs (in blue, represented by the Alerian MLP Index) have crushed the stock market (in red, represented by the S&P 500 Index) as a whole:
If you’re not already familiar with this structure, don’t worry. MLPs are a tax vehicle developed in the 1980s. They are publicly traded – like an ordinary stock – but act as what’s known as a “pass-through entity.”
MLPs must derive most of their cash flows – about 90% – from real estate, natural resources and commodities. And they must pass their earnings directly on to shareholders… and to the general partners that manage them. If they can pass these two tests, they get generous tax breaks.
Up until now, the Kinder Morgan group has been made up of two pipeline MLPs, Kinder Morgan Energy Partners L.P. (NYSE:KMP) and El Paso Pipeline Partners L.P. (NYSE: EPB), as well as Kinder Morgan Management (NYSE:KMR), a holding company.
But the big news shaking up the income-investing world is that Kinder Morgan – in a deal that is set to become the second largest in the history of the energy business – will scrap its MLPs and roll the whole group into a single non-MLP entity.
This makes sense in a rising-interest-rate environment. Because MLPs retain almost no cash after paying their partners, new builds have to be financed through debt.
And this is where rising interest rates come into play…
If its debt costs rise, Kinder Morgan’s ability to expand and grow will be severely impaired. That’s the real business effect of rising interest rates.
By breaking up the partnership, its new owner will be able to issue new stock… hold back a portion of earnings… and operate these assets without the restrictions MLPs come with.
That may be good for Kinder Morgan. But income-hungry investors will lose out on a great deal. Kinder Morgan Energy Partners was yielding 5.7% a year — three times what the average S&P 500 stock yields.
Reuters recently reported that the IRS has temporarily stopped issuing the private letter rulings (PLRs) companies seek when setting up new MLPs.
There are also signs that MLP’s tax-advantage status is coming under new scrutiny at the Department of the Treasury.
In response to questions about this from Reuters, a Treasury spokesperson wrote:
We at Treasury are looking into the effects of these transactions on future tax revenues.
Instances where the tax base may be eroded serve as a reminder of why we need Congress to enact business tax reform that broadens the tax base and lowers tax rates.
The potential impact of rising rates, coupled with the potential for changes to the tax code, could spell the ruin of this income-rich sector.
There is a way that is highly unusual – yet highly effective. It’s what the copywriters at Bonner & Partners call the “Instant Dividend” strategy.
It’s a pretty accurate description, actually. The income from this strategy hits your account instantly.
Don’t worry: It’s got nothing to do with the bond market. Or bank-loan ETFs.
And it’s got big advantages over dividend stocks, too…
The income payments it generates really are instantaneous. So, you decide exactly when to collect.
Compare that to dividend-paying stocks. These generally pay out on a quarterly basis. That means you have to wait up to three months to collect.
I even expect “Instant Dividends” to trounce the yields available on existing MLPs.
Here’s the entire story on Instant Dividends, so you can check it all out for yourself.