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.