Master limited partnerships are a unique investment class for the dividend-oriented and for the income-oriented investor alike.  As they are MLP’s, they generally pass cash down to investors at higher rates than traditional dividends, and many are passed through as a return of capital rather than as traditional income… hence what is often a better tax situation in the new normal.

Morningstar’s Paul Larson gave several sector picks today in the MLP sector, most of which are true MLPs.  Larson outlined Energy Transfer Equity, L.P. (NYSE: ETE).  It owns the general partner of two other MLPs, Energy Transfer Partners (NYSE: ETP) and Regency Energy Partners (NASDAQ: RGNC) in natural gas transportation businesses and ETP also owns a propane distribution business.

Enterprise GP Holdings L.P. (NYSE: EPE) was also given a positive outlook from Larson, and this is involved in a stock merger with Enterprise Products Partners L.P. (NYSE: EPD) that is still a deal pending unitholder approval.

Larson also likes TransCanada Corp. (NYSE: TRP), although this is a pipeline company in Canada that is not structured as a MLP and its dividend yield of 4.1% is more straightforward without many of the traditional tax headaches associated with an MLP.  Larson called it undervalued with a fair value estimate of $43.00 versus $37+ today.  Another of his alternative picks is Kinder Morgan Management LLC (NYSE: KMR) as being basically a different share class of one of the largest MLPs, Kinder Morgan Energy Partners.  Full Larson/Morningstar presentation

There are a couple of other means of investing in MLPs in a diversified manner that other pickers rarely make note of.  Kayne Anderson MLP Investment Company (NYSE: KYN) and JPMorgan Alerian MLP Index ETN (NYSE: AMJ) offer diversification with a return of capital component that still replicates income for investors.

Kayne Anderson MLP Investment Company (NYSE: KYN) is a closed-end equity mutual fund launched and managed by KA Fund Advisors, LLC that invests in the public MLP sector.  Its dividend can fluctuate and a recently announced payout of $0.48 per share for the last quarter is anticipated that a significant portion of the distribution will be treated as a return of capital for tax purposes.  That $0.48 rate has been paid for seven quarters (down from $0.50 before) and it has sold more shares and the current implied yield (again, not exact because return of capital) and its $26.10 share price compares to a 52-week trading range of $20.03 to $27.54.

JPMorgan Alerian MLP Index ETN (NYSE: AMJ) is an exchange-traded note that has a spotty dividend history since its 2009 launch.  If you smooth out the dividend it would have an implied yield of close to 5.2%.  At $33.95, the 52-week trading range is $24.26 to $34.15.

Before you chase these yields just as routine dividends, you will need to learn the tax structure, as well as the limitations and implications in investing in this asset class.

JON C. OGG

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