I recently sold two-thirds of my position in Enterprise Product Partners (EPD). I laid out all the facts behind the sale in the original article. However, several readers missed the facts, and instead utilized their opinions and their own experiences in order to negate the article.
Now I never pay attention to other people’s mere opinions, because I firmly believe that comments on my investing strategy do not really add much to my investment performance results. This is a crude paraphrase of Warren Buffett’s famous quote that “You Pay a High Price for Cheery Consensus” ( I am no Buffett though). However, when I am presented with facts, rather than opinions, I always listen.
I typically try to hold securities” forever”, although I tend to avoid holding too tight if I can find a better play(s) that is of similar quality, yet can provide me with more bang for my buck. Kinder Morgan Inc (KMI), Kinder Morgan Management LLC (KMR) and Oneok Partners (OKS) fit the profile.
If other comparable MLPs were trading similarly to Enterprise Product I would have been more than happy to hold. I am also trying to maintain flexibility as well, just in case. Dividend investing is not a black or white activity, which is why rigid rules based systems never really hold up in real life.
Many of the arguments against my selling related to the “onerous tax” picture of selling. I often have mentioned that I never care about taxation when I sell. More investment sins are probably committed by otherwise quite intelligent people, because of “tax considerations” than from any other cause. Anyone that puts taxes before investment quality is just asking for trouble. I have known of many investors who never sold their employer stock at a gain, in order to avoid paying taxes. Well, lucky for most of them, the gains had turned into losses by the time they needed the money to put a down payment on a house, send a kid to college or retire from the workforce. So much for putting taxes before your investment thesis.
However, as investing is more of a gray area than black or white, I am also open to a more softer approach to tax management. For example, this year I began maxing out my 401 (k). I also maxed out SEP IRA for 2012 right around April 15, 2013.
Because I am still in the accumulation phase of building my nest egg, I have come to realize that taxable MLP’s with their K-1 forms might not be the most optimal investment from a tax standpoint for me right now. This is because I don’t really plan on using this money to live off for several years from now. As a result, I might be better off in an entity like Kinder Morgan Management LLC than a Kinder Morgan Energy Partners. It doesn’t make sense to be collecting distribution income today from an MLP, when this reduces taxable base and my retirement is years from now.
Several individuals reaching out to me about the post, had mentioned that they had purchased Enterprise Product Partners at prices such as $20 to $30 per unit. Because they had held the partnership for so long, their basis was probably approaching zero. As a result, they viewed my selling of Enterprise Product as a bad idea.
However, they thought of it as a bad idea, because they didn’t read the facts of the article, that was pertaining to my situation. Instead they chose to be viewing it from their own position. Ignoring facts is typical in most aspects of life, as humans are emotional creatures that respond better to emotion that factual evidence. Ignoring the facts is what separates winning investors from losing one.
Basis in master limited partnerships can keep dropping over time, because depreciation typically is higher than income, and therefore the net result is a distribution that is classified as return of capital by the tax authorities. As a result, this distribution decreases your tax basis. This means that as long as your basis is above zero, any distributions you receive from an MLP would not be taxed.
If you decide to sell however, your tax situation is very interesting. If you bought at $40 per unit in 2011, and sold at $63.73 per unit in 2013 your gain is more than the $23.73 difference. This is because you likely earned about $6.27 per unit in distributions during that period ( approximations are made in this example in order to end up with nice rounded numbers that are easier to digest). As a result, you owe about $30 per unit to tax authorities. $6.27 of this would be taxed as ordinary income, while $23.73 would be taxed as a long-term capital gain.