At first glance, Kinder Morgan’s dividend-payout ratio seems unreasonably high, at 425%. Of course, MLPs are different from other dividend-paying companies, in that they tend to pay out more than their earnings. This is because of the way these companies calculate depreciation and depletion expenses, and it also contributes to the way their distributions are considered for tax purposes.
In short, MLPs tend to pay out far more in distributions that one would think possible, and these distributions also tend to be mostly tax-deferred, making them an excellent addition to an income portfolio.
Kinder Morgan Energy Partners LP (NYSE:KMP) scores a 13 on my ratings system. Yes, its monthly distribution is attractive, and this company tends to be recommended when people are talking about MLPs, but I’ve looked at it five or six times, and it never scores well. There are better MLPs.
A better MLP in my opinion
And, not coincidentally, the next company on Cramer’s list is one of them. , is another oil and gas pipeline Master Limited Partnership, and this one has been in my portfolio since December.
I recently reviewed Enterprise Products Partners L.P. (NYSE:EPD) and two other MLPS in Do You Want These 3 “Superior” MLPS for your Dividend Portfolio?
Bottom line, Enterprise Products Partners is currently trading at approximately $61 and yields 4.30%. This is a significant change from when I bought; it was trading at $50 and yielding 5.30% at that time. However, despite the share price increase and commensurate dividend decrease, it still has excellent dividend metrics and I am still delighted that it is in my portfolio.
Another MLP to consider?
The third company on Cramer’s list is Williams Partners L.P. (NYSE:WPZ), a smaller MLP that I have not examined in the past.
Williams Partners L.P. (NYSE:WPZ) is currently trading at approximately $52 and yields 6.60%. It has paid and raised dividends consistently for seven years, its five-year DGR is 7.9%, and the total twelve-month return is less than 1%.
Other metrics that I use when calculating a rating for a dividend company include analysts’ five-year annual growth estimate (11.9%) and the company’s PE (26.6).
Williams Partners L.P. (NYSE:WPZ) scores an 11 on my ratings system. Great yield and earnings growth estimate, but in January, I chose a different MLP for my portfolio – Sunoco Logistics Partners. Take a look at it instead, if you want to add another MLP.
No REITs in my portfolio
The last company that Cramer recommended that I want to examine is a REIT, Healthcare Trust Of America Inc (NYSE:HTA). I’ll state right upfront that I don’t have any REITs in my portfolio, and that every one that I have examined has failed to meet my criteria. But, to be fair, I’ll look at this one now.
Healthcare Trust launched in June, 2012, so immediately, I dislike it for its lack of history. I only choose companies that have paid and raised dividends for at least ten years.
It is currently trading at approximately $11.50 and yields 4.80%. Its share price is up 16% from its launch, but down significantly from its high of $13.34, which was reached early in May; the price has been falling since the 1Q13 earnings release.
I can’t score Healthcare Trust using my system, because it is too new. Jim Cramer and TheStreet.com have been big fans lately of the REIT, with lots of articles and an interview with the CEO, Scott D. Peters.
However, I’m not willing to trust my money to a brand-new REIT. Since the other REITs I have examined have always failed to meet my standards, I’m not willing to make an exception for this one.
Ten better suggestions
Take a look at the ten companies in my Perfect Dividend Portfolio. They might not be yielding 6%, like some of the ones on Cramer’s list, but they are rock-solid and committed to not only paying their dividends, but also to raising them at excellent annual growth rates. And they have the other metrics to back up their dividend strategies.
We don’t all have $590 million to keep us in jewels and furs for the rest of our lives. We have to invest in the real world. Make smart decisions.
Karin Hernandez is long Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners L.P..
The article Jim Cramer: Invest Like the Ridiculously Rich in High-Yielding Stocks originally appeared on Fool.com.
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