Canadian yield-oriented investors - particularly retirees - should sell low-yielding Canadian securities and buy the counterpart investment which trades as a U.S. Master Limited Partnership (MLP) in the United States.

The first candidate is Enbridge Inc. (ENB on the TSX or NYSE) - a large, infrastructure/pipeline/energy company, traded on the Toronto Stock Exchange. If you are a yield-oriented investor, you can sell it and buy the U.S. MLP - Enbridge Energy Partners, L.P. (EEP.NYSE). This is not to suggest that the Canadian and U.S. entities are in the identical businesses. The American business is a small subset of the Canadian energy and infrastructure conglomerate. The table explains the differences:

When you own the Canadian security, you are taking on the risk of the U.S. Master Limited Partnership in any event. The Canadian parent owns 21% of the U.S. security.

Consider yield on an after-tax, after fees, basis. If one has two investments with identical risks and yields, but one is taxed at a higher rate than the other (or incurs higher fees than the other), the one with the better after-taxes and fees is the better choice. Therefore, let's start by examining the taxation consequences of the alternatives.

The American MLP has the characteristics of our now-defunct Canadian business trusts. Income is not taxed in the MLP; rather it is passed-through and taxed in the hands of the investor. Thanks to the tax treaty between Canada and the U.S., the taxation and record-keeping for Canadians is not complex. Details of the taxation differences between American MLPs and Canadian dividends are in this article.

The disparity between taxation of eligible Canadian dividends and foreign income, is substantial.

* Canadian tax rate estimate - source: Minimizing Income Taxes on Your Investments

The after-tax yield on investment for the U.S. MLP exceeds those of the Canadian security - the U.S. Enbridge yield is 1/3 higher than the Canadian counterpart (the math: 3.6% - 2.4% / 3.6% = 33%). Just a few months ago, the differential was over 40%. In other words, if you are seeking after-tax yield, instead of capital growth (or a combination of both for overall return), the U.S. MLP is the better asset choice.

Let's also take a look at the charts for both securities. The 1st chart is a 1-year comparison:

This next one is a 5-year chart:

As one can see, this strategy is for yield-oriented investors only - such as retirees. For those seeking capital gains, or a combination of dividends plus capital gains, buying the Canadian security would be a better choice over the long-term (a 5-year time horizon).

Another important consideration is the aspect of diversifying into USD. Currently the Canadian Dollar (CAD) is around $0.89 per U.S. Dollar (USD). There are many opinions about what proportion of one's portfolio should be diversified into other currencies and jurisdictions, but if you plan to hold USD, the return from holding the U.S. MLP far-exceeds the 2%, 10-year (gross) rate for U.S. Treasury Bills.

To wrap up, the after-tax yield on one of the largest Canadian infrastructure securities is far lower than the U.S. MLP counterparts. If you are seeking yield, sell ENB (TSX or NYSE) and buy its partially-owned, American operation: EEP.NYSE.