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Home > Portfolio Updates > Portfolio: Tax Deferred Without An IRA

Portfolio: Tax Deferred Without An IRA

November 6th, 2011 Leave a comment Go to comments

This portfolio, named ‘Tax Deferred Without An IRA’ contains investments that defer taxes. You might think that this isn’t possible because you need a sheltered account, such as a ROTH IRA, 401(K), or one of the other many retirement and college savings accounts. While the investments provide tax deferment, note that this doesn’t not mean tax avoidance.

The secret to the deferment (when you buy these in taxable accounts, such as your broker accounts) is the use of ‘Return Of Capital’. This is an accounting device legally used by companies setup as Partnerships. It occurs when partnerships distribute their cash flow to unit holders that is lower than available depreciation and write offs from the business. From a tax point of view, you are getting back the money you invested, which was already taxed. Taxes are due when you sell your investment.

Don’t be misled. The partnerships make real money and many are great investments. It’s the company structure that creates this special tax situation.

Portfolio Holdings

  • Merrill Lynch & Co., Inc. Preferred Stock (NYSE:MER-E) (dividend yield: 8.0%) Merrill Lynch Preferred Capital Trust IV, 7.12% Trust Originated Preferred Securities (TOPRS), liquidation amount $25, guaranteed by Merrill Lynch & Co. Inc. (NYSE: MER) (See our definition of Guaranteed in our Glossary of Income Investing Terms for the technicalities of the guarantee), redeemable at the issuer’s option on or after 6/30/2008 at $25 per share plus accrued and unpaid dividends, with no scheduled maturity, distributions of 7.12% per annum are paid quarterly on 3/30, 6/30, 9/30 & 12/30 to holders of record one business day prior to the payment date. The company has the right, at any time, to defer interest payments for up to 6 consecutive quarters (see IPO prospectus for details). The trust’s assets consist of the 7.12% Partnership Preferred Securities representing the limited partnership interests of Merrill Lynch Preferred Funding IV L.P. which have no scheduled maturity date and which were purchased from the company using the funds generated from the sale of the trust preferred securities.
  • Enterprise Product Partners (NYSE:EPD), (dividend yield: 5.5%) Enterprise Products Partners L.P. (Enterprise) is a North American midstream energy company providing a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products and certain petrochemicals. Enterprise operates in six business segments: NGL Pipelines & Services; Onshore Natural Gas Pipelines & Services; Onshore Crude Oil Pipelines & Services; Offshore Pipelines & Services; Petrochemical & Refined Products Services, and Other Investments. The Company conducts all of its business through its subsidiary, Enterprise Products Operating LLC (EPO). The Company is managed and controlled by Enterprise GP, which has a general partner interest in it. On September 7, 2011, the Company and Duncan Energy Partners L.P. (DEP) announced the merger of DEP with a subsidiary of the Company.
  • Kinder Morgan Partners (NYSE:KMP) (dividend yield: 6.0%) Kinder Morgan Energy Partners, L.P. (KMP) is a pipeline transportation and energy storage company in North America. KMP owns an interest in approximately 28,000 miles of pipelines and 180 terminals. It operates in five business segments: Products Pipelines, Natural Gas Pipelines, CO2, Terminals and Kinder Morgan Canada. The Company’s pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and other products. Its terminals store petroleum products and chemicals and handle bulk materials, such as coal and petroleum coke. On September 1, 2010, it acquired the natural gas treating assets of Gas-Chill, Inc. In May 2010, its subsidiary KM Gathering LLC purchased a 50% ownership interest in KinderHawk Field Services LLC. During the year ended December 31, 2010, it acquired Linden, Baltimore and Euless facilities, and acquired the refined products terminal assets at Mission Valley, California from Equilon Enterprises LLC.
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