This Is My Favorite Kind of Money

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My favorite kind of money does three things.

First, it grows. And it keeps growing every single year – by double digits.

Second, and unlike most corporate profits, it only gets taxed once.

And third, it's "lean." The businesses paying my favorite kind of money are very sensitive to cost, while retaining virtually no earnings. After all, they have to pass through nearly all their income to investors.

Few investments give you all three of these benefits, of course. That's what makes the shares below so attractive.

First, let's look at each of my "favorite money factors" more closely…

Factor No. 1

Double-Digit Growth

Financial planners like to put you in one of two camps:

The "growth camp," which they say is right for younger investors, and the "income camp," which they say is proper for retirees and those close to retirement.

As we've said before, don't believe it. In reality, growth and income are inseparable.

There's only one reliable way to make 10% or more a year… especially now, in a rising interest rate environment.

We have to seek total return. For me, this means targeting companies that:

  • generate decent current income, around 5% to 10% a year, and
  • support that income with strong underlying business fundamentals… resulting in another 5% to 10% of capital appreciation.

So, seeking yield alone is dangerous. It can suck you into bad investments. After all, a high yield is high for a reason.

Factor No. 2

A Brilliant Tax Structure

My favorite kind of money comes directly to me, and it doesn't make any stops along the way, either. That's why I like master limited partnerships (MLPs), real estate investment trusts (REITs), business development corporations (BDCs), and private equity firms.

You see, all of these companies are organized as pass-through entities. They're set up differently than traditional public corporations. While traditional corporate structures are designed to retain earnings, pass-through entities such as these are designed to funnel at least 90% of their earnings directly to shareholders.

And you'll get to keep far more of your pass-through profits, too.

For shareholders, pass-through securities offer the limited liability protection of traditional corporations, but without the infamous double tax bite you'd normally take from Uncle Sam.

Because pass-through securities' cash flow is paid out to shareholders – without corporate tax – and is only taxed once at the partner level.

The reason for this is due to the legal structure of pass-through securities, which, as I've mentioned, are set up to distribute at least 90% of their earnings directly to shareholders or unitholders.

This single taxation, as opposed to the double taxation on traditional corporations, means dividend payouts from pass-through entities are bigger – much bigger. As we'll see, this makes many of their annual dividend yields much more attractive.

How these entities treattheir own money is pretty impressive, too.

Factor No. 3

Highly Efficient Management

Because these companies are obligated to distribute some 90% of their earnings to unitholders, there is little in the way of retained earnings left… for management to spend on perks such as private jets and $500,000 holiday parties. This forces MLPs to be lean and efficient, compared to traditional corporations, fat with cash.

Because of lower taxes, cash-producing assets such as oil wells become more profitable under MLP ownership than corporate ownership. Many MLPs take advantage of their favorable tax structure by buying oil wells from energy companies barely making money on these wells after-tax.

You'll love the yield, too.

Of course, the most attractive aspect of pass-through securities is their outstanding yields. While most energy stocks offer yields of about 3%, most of the biggest energy MLPs offer yields in the 8% to 10% range. This kind of yield is something that's attractive to most investors, especially those who are focused on generating income from their existing assets.

I remember the 1980s, when Congress first approved the use of MLP structure in energy exploration and production firms. I knew then, as now, that this unique approach had a bright, and profitable, future ahead of it. It wasn't long after approval that other companies in other industries made the move to become pass-through entities. The tax advantages alone made sure that happened. And three decades later, we have much more to choose from: MLPs, REITs, BDCs, and private equities.

They're different securities, of course, but they're all my favorite kind of money.

What I'm Looking at Right Now

These shares all represent MLPs, REITS, BDCs, and private equity. There are plenty of great investments in this group, but these are my very favorites:

Vornado Realty Trust (NYSE: VNO)

Teekay LNG Partners L.P. (NYSE: TGP)

Kinder Morgan Energy Partners L.P. (NYSE: KMP)

The Blackstone Group L.P. (NYSE: BX)

Kohlberg Kravis Roberts & Co. L.P. (NYSE: KKR)

Join the conversation. Click here to jump to comments…

  1. Robert in Canada | November 13, 2013

    The article says "So, seeking yield alone is dangerous. It can suck you into bad investments. After all, a high yield is high for a reason."

    Yes that's true but it really depends on the reason the yield is high.

    If a yield is high because the stock price dropped due to any of the followings reasons, it's OK to buy that stock:

    – There was some bad news but the problem is just temporary or a one time event
    – The stock dropped far below it's fair value just because the whole stock market dropped
    – One major stock analyst released a bad comment about the stock, but all other analysts think it's OK

    • Ayoola Rasaq | March 6, 2014

      If a yield is high because the stock price dropped due to any of the followings reasons, it's OK to buy that stock:

    • Deborah G | April 25, 2014

      Also I like a few High yielders in my portfolio to beef up the total return. I watch my portfolio a few times a day and also watch and listen to many financial stations. If you have tight stops and a watchful eye a few are ok. Right now I am looking at AGNC,NLY,Just sold Sandridge Mississpean Trust but made good money on the dividends. I think you have to be careful but certainly not as fearful if you watch.What I do with the profits on any of the spec plays is use them to increase my holdings in some of my core stocks like T and MO. That way I always get steady returns and I have [knock wood] not gotten caught with a high yielder that tanked so far

  2. Karl B. Hensel | November 29, 2013

    The plans are in the works for CBBanks to start up or commodity backed banks. China and other powerful nations have been exploring the possibility. If this occurs. What will it do to the U.S dollar which is backed by nothing but manipulated paperwork. The interest in going to didgirtal currency is also on the rise. I am not referring to bitcoin which is doing quite well but a currency that will completely bi-pass the dollar and work more like a bartering currency. Too many Americans are fed up with corporate earnings being at the highest ever and workers disposable income at its lowest. I am a proponent of such change and hope it will wake up and shut down the corporate business structure that currently exists. Profits through low wages. No benefits and part time work.
    It will happen. We have the technology and the brilliant minds to destroy those who are hell bent on destroying the middle class.

  3. Karl B. Hensel | November 29, 2013

    I love the article on how 90% of profits of a business going to investors. What about the workers who are being paid so little they can not even afford to buy shares of the companies they pour their sweat and blood into in making the profits but are compensated with poverty level earnings. Very little is ever reported on them why? Courage I suppose is the answer. Gutless syndications who are unwilling to report the reality of what is going on in corporate America today.

  4. Karl B. Hensel | November 29, 2013

    Your reporting on graphene is so scewed it is laughable. 98% of all graphene patents held by corporations are trolls. They wait till the research and development is conducted by others and as soon as they achieve massive profits they launch law suits for patent infringement to more or less steal the money away from those who put the effort forth in bringing such products to market. Explore GTI and the law suits they have filed against Korean companies who have developed and are currently selling graphene sheets for cell phones in heat dispersion.
    You never will as the truth is something you turn a blind eye on. I wish I reported for your organization. However you would be to concerned on the level of followers and your readerships reaction to the actual facts of the matter.

  5. Arthur | February 1, 2014

    Have you seen a better balance sheet
    on any stock?

    BORN

    NUIN

    AW

  6. Michael Kucewicz | March 14, 2014

    Whatare your thoughts on PHYSICAL Silver possession-1/2,1,2,and 5oz.bullion,American Eagles,Canadian Maple leafs,Pesos,Chinese Pandas,etc???
    Thanks,
    Mike Kucewicz
    171 Nettleton Ave.,
    Milford,CT. 06460

    • Deborah G | April 25, 2014

      I buy 4 x 5 oz silver a month just to keep adding to my metals. I buy 1/2 gold bi monthly as well. That is a smart way to dollar cost average and to build on a position that gives you diversity with your stock holdings.

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