Join the Rentier Class with MLPs

As the stock market has been decimated, the secular bear investors have been squirreling away money in low return short term government debt or quite literally stuffing it in mattresses. The phrase “return of capital, not return on capital” has regained popularity. Yet some investors such as me are willing to expand our risk appetite and are looking for a relatively safe yet profitable way to deploy capital.

One way is to become part of the rentier class. A rentier is a person who collects property income such as rents, incomes, or capital gains from fixed assets. Karl Marx called such people “parasites” and called “rentier capitalism” a decadent form of capitalism. Notwithstanding Mr. Marx’s view, I have found a vehicle that provides relative safety, throws off a stable income stream, and has the potential for capital gains when the stock market eventually recovers.

The vehicle I have in mind is Master Limited Partnerships or MLPs. Master Limited partnerships are limited partnerships that trade U.S. securities exchanges. The advantage of these securities is that they combine the corporate structure of limited partnerships with the liquidity of trading on an exchange. MLPs have historically been concentrated in the energy infrastructure space such as pipeline companies. The MLPs avoid corporate taxes by virtue of their limited partnership status and are forced to make minimum quarterly distributions. This requirement for distributions makes the income stream very predictable along with the stable nature of the pipeline business. The pipelines basically are collecting a tariff for allowing the oil, natural gas, gasoline etc... to transit their pipeline. The pipelines are operating as turnpikes for energy products and are not as affected by commodity pricing the same way an exploration and production company which reacts with more volatility.

The Kayne Anderson Total Return Fund (KYE) is a closed end fund that trades on the NYSE. The objective of the fund as described on its website is that KYE is a closed-end fund that invests principally in equity and debt securities of companies in the energy industry, such as energy-related master limited partnerships (MLPs), U.S. and Canadian royalty trusts and income trusts (collectively, “royalty trusts”), marine transportation companies, and coal companies. KYE’s objective is to obtain a high total return with an emphasis on current income. The company holds diverse positions in some of the largest MLPs in the U.S., which provides diversity which is important in today’s markets. The fund, as most closed end funds do, trades a discount to net asset value. The nav is published every Thursday and helps investors time their purchases in order to buy one dollar of assets for sometimes a substantial discount.

Another benefit of KYE is that it can be held in an IRA as the company issues a 1099 as opposed to K-1’s for MLPs and because KYE does not generate unrelated business income. This also cuts down on the paperwork which has been off putting to investors in the past. The current dividend return is around 18% which is about 2.5 times its historic yield. The fund price has been decimated along with the rest of the market but as energy prices have stabilized, appear to have bottomed and may be heading north again I suspect the money flow will return to KYE and give the possibility for substantial capital gains along with high current income.

Disclosure: Long KYE.

Comments

[mplaut:]

The main purpose of Closed End Funds such as Kye is to allow this type of security to be held in an IRA rather than the MLPs themselves as the CEF does not have the tax problems of the MLPs.

Unless you have a very small amount to invest, you can buy the MLPs themselves and save a layer of commissions.

There are very good values in very secure companies.

Companies to start your research include KMP and CPNO which have mainly fee based income.

There are also well hedged production companies like LINE and EVEP.

Mar 16 06:57 AM

[Delojozafado:]

The author's discussion of (KYE) focuses on MLPs. Why not examine then the benefits of KYE against (KYN)? KYN is almost exclusively MLPs. KYE is a buy alright if at any discount which is not that often. It is also ~14% invested in Canadian "Can-roys". Beginning in 2 years the tax structure is scheduled to change on these investments. That is worth some discussion. That situation is open to possibly changing or being postponed. Also currently the Loonie has been struggling, recently dipping below .77 briefly. As oil goes so will go the Loonie. Some technicians have predicted as low as .65. Other market based observers believe the .82 region is more likely by year end. Personally I look for "aboot" .90 within one year as the currency of the worlds best managed economy with the worlds strongest banking system wins out in the end. More than 10% of the KYE portfolio is then leveraged to the Loonie posing currency risk.

I prefer KYE to the KYN because the usual premium to both is generally higher for KYN. Another positive is the diversification away from MLPs only which should provide some better capital appreciation going forward. Another positive is the manager Kayne Anderson is a narrowly energy focused manager. Energy is what they do with only 3(?) CEFs. In the last quarter KYE released a statement indicating that there was a minimum dividend distribution target for 2009. They claimed they had enough cash and cash flow to meet this goal. Any dividend cut would possibly send these shares back below net asset value and drive back the yield to +12%.

Some other related ideas to the authors blog might be (ENY) 100% levered to the Loonie and currently 70% O&G Canroys and 30% oil sands. Very beaten down and not necessarily a steady dividend payer. The MLP CEF (MTP), which is almost always selling at a discount and pays out monthly instead of the quarterly KYE distribution. MTP has a small percentage of non-oil related "blue chips" (?) for some diversity. (BSR) is an ETN, no tax break on distributions as they are counted as interest but a pure play like KYN without the steeper premium to NAV. The (BGR) is an energy CEF that is overweight the coal sector. Especially the met (Appalacian) coal used in steel production. There is the (IRR) another closed ender that is composed of the major integrated "big oils". Lastly there is the as of late volatile (REP-PA). Repsol is the Spanish oil company headquartered in the Cayman Islands or the Bahammas? This preferred of a $13 billion capitalization company recently traded above $20 to below $17 against it's $25 par value. This was certainly a dramatic discount given this issuance traded so cheaply against it's ex dividend date which was just this last Friday. It was gaining again on Friday. Any post ex swoon in REP-PA may offer an opportunity back down below $18? This issue is a "non-Cumulative" so the dividend may be ????

Most of these equities are trading in a $4-$5 range as the market and the oil price seem to be trading in a range as well. ENY below $8 is a buy & a sell above $11. KYE a buy below $11.50 should be lightened up on above $14. BSR a buy at below $21.75 again should be lightened at +$25.50. MTP buying post the ex date generally around $8.80 and lightened up on in the near $11 area. BGR same thing buying near $13 & selling near $17. By purchasing partial positions and then unloading partial positions in the rallies you can build up your share base while taking some capital gains. Shares that do not hit their sell targets collect dividends.

Mar 16 07:52 AM

[henarl:]

Delojozafado: Great post with lots of good info. Thanks.
I'm currently long KMP, OKS, MWE, LINE, UNG, and recently sold PAA.

Mar 16 11:50 AM

[granger:]

Great info, thank you. I have been holding IRR for over a year now, will check out the others.


On Mar 16 07:52 AM Delojozafado wrote:

> The author's discussion of (seekingalpha.com/symbo...) focuses
> on MLPs. Why not examine then the benefits of KYE against (seekingalpha.com/symbo...)?
> KYN is almost exclusively MLPs. KYE is a buy alright if at any discount
> which is not that often. It is also ~14% invested in Canadian "Can-roys".
> Beginning in 2 years the tax structure is scheduled to change on
> these investments. That is worth some discussion. That situation
> is open to possibly changing or being postponed. Also currently
> the Loonie has been struggling, recently dipping below .77 briefly.
> As oil goes so will go the Loonie. Some technicians have predicted
> as low as .65. Other market based observers believe the .82 region
> is more likely by year end. Personally I look for "aboot" .90 within
> one year as the currency of the worlds best managed economy with
> the worlds strongest banking system wins out in the end. More than
> 10% of the KYE portfolio is then leveraged to the Loonie posing currency
> risk.
>
> I prefer KYE to the KYN because the usual premium to both is generally
> higher for KYN. Another positive is the diversification away from
> MLPs only which should provide some better capital appreciation going
> forward. Another positive is the manager Kayne Anderson is a narrowly
> energy focused manager. Energy is what they do with only 3(?) CEFs.
> In the last quarter KYE released a statement indicating that there
> was a minimum dividend distribution target for 2009. They claimed
> they had enough cash and cash flow to meet this goal. Any dividend
> cut would possibly send these shares back below net asset value and
> drive back the yield to +12%.
>
> Some other related ideas to the authors blog might be (seekingalpha.com/symbo...)
> 100% levered to the Loonie and currently 70% O&G Canroys and
> 30% oil sands. Very beaten down and not necessarily a steady dividend
> payer. The MLP CEF (seekingalpha.com/symbo...), which is
> almost always selling at a discount and pays out monthly instead
> of the quarterly KYE distribution. MTP has a small percentage of
> non-oil related "blue chips" (?) for some diversity. (seekingalpha.com/symbo...)
> is an ETN, no tax break on distributions as they are counted as interest
> but a pure play like KYN without the steeper premium to NAV. The
> (seekingalpha.com/symbo...) is an energy CEF that is overweight
> the coal sector. Especially the met (Appalacian) coal used in steel
> production. There is the (seekingalpha.com/symbo...) another
> closed ender that is composed of the major integrated "big oils".
> Lastly there is the as of late volatile (REP-PA). Repsol is the Spanish
> oil company headquartered in the Cayman Islands or the Bahammas?
> This preferred of a $13 billion capitalization company recently traded
> above $20 to below $17 against it's $25 par value. This was certainly
> a dramatic discount given this issuance traded so cheaply against
> it's ex dividend date which was just this last Friday. It was gaining
> again on Friday. Any post ex swoon in REP-PA may offer an opportunity
> back down below $18? This issue is a "non-Cumulative" so the dividend
> may be ????
>
> Most of these equities are trading in a $4-$5 range as the market
> and the oil price seem to be trading in a range as well. ENY below
> $8 is a buy & a sell above $11. KYE a buy below $11.50 should
> be lightened up on above $14. BSR a buy at below $21.75 again should
> be lightened at +$25.50. MTP buying post the ex date generally around
> $8.80 and lightened up on in the near $11 area. BGR same thing buying
> near $13 & selling near $17. By purchasing partial positions
> and then unloading partial positions in the rallies you can build
> up your share base while taking some capital gains. Shares that
> do not hit their sell targets collect dividends.

Mar 21 04:41 AM