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posted on January 25, 2013 at 5:19 pm
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I added Targa Resources Partners (NGLS) to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ on January 11 because the units offer a really attractive potential for dividend growth and capital gains. The current dividend, at 6.81% on January 11, isn’t any too shabby either. (For the most recent update on that portfolio see my post http://jubakpicks.com/2013/01/11/reformatting-my-dividend-income-portfolio-for-a-period-when-dividend-investing-gets-more-important-and-tougher-too/

The big upside here comes from Targa’s acquisition of oil and natural gas pipelines from Saddle Butte Pipeline that for the first time moved Targa into the Bakken shale formation of North Dakota that is the heart of the U.S. oil boom. The deal also gave Targa its first oil pipelines—before that Targa had been a natural gas only pipeline play. The North Dakota oil boom is currently very underserved by pipelines, which gives pipeline companies with footholds in the area, and that now includes Targa, an opportunity to invest today’s cheap money in profitable new capital projects.

After the deal Targa reiterated its projections for 10% growth in distributions to holders of the MLP (master limited partnership) units in 2013 from 2012 levels. And the assets added in the deal look to me like they take some of the risk out of Targa’s cash flow. The company has been moving to increase the share of its revenue that comes from fee-based transportation of natural gas liquids from 37% in the last twelve months to a projected 55% by the end of 2014. Fee-based rather than price-based revenue gives Targa protection from what looks like a developing oversupply of natural gas liquids.

I think Targa can easily grow distributions by 9% or so a year over the next few years. That distribution and dividend growth gives Targa—and investors in Targa—protection from a return of inflation or from rising interest rates.

I calculate a one-year target price of $44 for Targa.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Targa as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/


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  • aondehafka on 25 January 2013

    On the subject of dividend income, do you have any thoughts on CVR Energy (CVI)? It just announced a 3.00 yearly dividend and will pay a special dividend of 5.50 in February.

  • Money1 on 26 January 2013

    What are the tax consequences, if any, to the average investor who buys a MLP such as Targa? Is the treatment the same as buying ordinary common stock?

  • Dan Miller on 26 January 2013

    I was wondering the same thing as Money 1 about the tax treatment of dividends. I don’t mean to sound ignorant, but how can a company pay out more in dividends than it earns? Sounds like part of the dividend would be a return of capital.

  • rgc1042 on 27 January 2013

    Does Targa issue a K-1 or a 1099?

  • Smartinvestor on 28 January 2013

    Tax treatment for MLP’s is vastly different from that of stock. And yes, MLP distributions are partly return of capital. Your cost basis will gradually decrease over time, resulting in capital gain when you sell.

    MLP’s themselves are not taxed, so all taxable income/loss items from operations are passed on to the unit holders, who will receive a K-1 rather than a 1099 at year-end. If you are not familiar with reporting K-1’s on your tax return, I recommend you do some research before investing, especially if you do your own taxes. Most software programs like Turbotax or Taxcut would handle it fairly easily, but you still need a basic understanding of what you’re doing.

    There are numerous other tax considerations of MLP’s as well, so you should definitely do some research before investing. One of them is you may have to file state tax returns in every state the MLP operates in, which could be 1, or it could be 8, 9, 10 or more. I don’t know how many Targa operates in. I am not a unitholder of Targa.

  • carnut2010 on 29 January 2013

    Is anyone aware of any unique tax considerations if NGLS is held in an IRA? I do use TurboTax.

  • hawkinsond on 22 February 2013

    My Roth IRA wouldn’t allow NGLS as a Master Limited Partnership into my account.

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