A Perfect Alternative for Your IRA
I’ve made no secret of the fact that energy MLPs are one of my top investment themes — but they’re not ideal for all accounts. I wouldn’t hold any of these K-1 related income assets in your IRA, as the IRS allows for only $1,000 per year in MLP-related income before penalties are applied. Generally speaking, it’s easier to avoid this kind of situation than to have to actively manage those holdings in a retirement account.
That’s why I’m happy to share this next energy pick: LinnCo (LNCO).
As noted on the company’s website, LinnCo was “created to enhance LINN Energy’s ability to raise additional equity capital to execute on its acquisition and growth strategy. LinnCo’s sole purpose is to own LINN units and has no assets or operations other than those related to LNCO’s interest in LINN. As a result, LNCO’s financial condition and results of operations depend entirely upon the performance of LINN.”
The primary difference between the two is tax treatment. Income from LINE is reported on a K-1, but income from LNCO is reported on a year-end 1099 and is taxed as ordinary income. The yield on LNCO shares is a tad higher, currently 9.5% because the shares are trading at a slight discount to shares of LINE. Both stocks are paid the same stated $2.90 annual distribution, just treated differently by the IRS.
The other bonus for income investors is that both LINE and LNCO pay monthly distributions, a very nice feature that more MLPs are adopting to attract investors and smooth out volatility. As investor confidence returns and boosts the LINE share price, a comparable yield of 7%-7.5% to its competitors implies a $38 unit price — or higher if the company hikes the future payout. Shares of LINE are ideal for cash accounts, and shares of LNCO are a great fit for retirement accounts.
All three of the MLPs I’ve recommended today are holding strong at the moment, bolstered by the Kinder Morgan deal — but don’t forget that August is typically a difficult month for equities in general. I suggest you use one of these down days as an opportunity to go discount-shopping for great dividend stocks like MEMP, LINE and LNCO … then look to ride the wave higher on the next rally.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and up to 4x greater income.