Best Investments for Rising Oil? High Dividend Energy Stocks

INTRODUCTION: WHY SETTLE FOR JUST APPRECIATION WHEN YOU CAN ALSO GET HIGH INCOME?

Given the multi-month recovery in energy prices (aided by the ongoing long term weakness in the US dollar in which energy is priced), one sees a lot written on how to play energy’s recovery.

For example, in Best Investments for Rising Oil, fellow SA contributor Jason Kelly noted a number of worthy ways to play in long term rise in oil.

However, most of these do not provide significant dividends, and are thus a pure bet on price appreciation. To profit on them, you need to be right not only on their price direction, but on WHEN to sell. That’s fine if you like to gamble.

Here’s a better idea. The below stocks offer even better returns and lower risks. Why?

• They rise along with energy prices: They rise along with energy prices at similar rates to those ETFs and stocks in the above mentioned article.
• High, steady income: They pay some of the highest and most reliable dividends available, typically 7-11%, sometimes more. The energy producer trusts mentioned below have to cut dividends when energy prices are dropping, so their dividends are more risky, but only if you believe energy prices will drop back even more than they did earlier this year.
• USD Hedge: The Canadian firms pay their distributions in Canadian dollars, thus providing a USD hedge for those based in US dollars. Many expect the CAD to appreciate against the USD as energy prices recover, fueling additional price and income gains.
• Energy infrastructure firms’ income does not drop if energy prices fall: The Infrastructure firms (both Canadian and American) offer yields that are not only high but unusually steady, as described below.

So, if you’re in the markets to make money rather than gamble, why not place your money in stocks that not only rise right along with energy, but also pay you some of the market’s highest dividends while you hold them.

I’ve discussed recommended buy prices for many of these in past posts, and hope to go in depth on the US MLPs in the near future. Also, the stock market appears overbought and due for a correction, so this is not the time to be taking more than partial positions, especially with the more thinly traded Canadian stocks, which can be volatile.

Also, on or before 2011, the Canadian Income Trusts will be taxed at higher rates due to Canadian tax “reform.” As mentioned earlier in 2011, A Canadian Tax Odyssey: Canadian Income Trust Investors' Guide the firms mentioned below are well positioned to continue to maintain or grow their current distributions. Some have already committed to doing so. If energy prices recover, maintaining current distributions won’t be difficult.

Canadian Oil/Gas Energy Income Trusts

Their revenues, dividends, and share prices move with energy prices. They dropped 30-60% from last summer to this past winter, and are charging back. For example, check charts of ERF (paying over 8%) and VETMF.PK (paying over 7%). Dividends, yields, and prices will rise if energy continues its move up.

Plus, you get the added bonus of being paid in Canadian dollars, which are likely to rise against the USD and give those based in USD assets a hedge against the USD.

• ARC Energy Trust (AETUF.PK)
• Claymore/SWM Canadian Energy Income Fund (ENY): A fund of these and others.
• · Enerplus Resources Fund (ERF)
• · Peyto Energy Trust (PEYUF.PK)
• · Provident Energy Trust (PVX)
• · Vermillion Energy Trust (VETMF.PK)

Canadian Clean Energy Income Trusts

Similar story but also benefit from inevitable government bias toward green energy. Plus that great USD hedge from being paid in CAD.

• Energy Savings Income Fund (JUSTF.PK): symbol recently changed from ESIUF
• Innergex Power Income Fund (INRGF.PK)
• Macquarie Power & Infrastructure (MCQPF.PK)
• Great Lakes Hydro Income Fund (GLHIF.PK)

Canadian Energy Infrastructure Income Funds

In fact, their incomes are mostly fixed by long term volume based contracts, though their prices tend to move with energy anyway, making them especially good buys when energy is down and these companies revenues and dividends remain steady. These too give you the USD hedge by paying you in CAD.

• Altagas Income Trust (ATGFF.PK),
• Pembina Pipeline Fund (PMBIF.PK)

U.S. Energy Infrastructure Master Limited Partnerships (MLPs)

The above comments about Canadian Infrastructure Income funds apply here too. They make most of their money on preset volume contracts and thus have steadier income than the above energy producers. As American companies they pay in USD and lack the USD hedge bonus of the Canadian firms. However, they have near monopoly pricing power in their regions of operation (tempered by regulators).

• Buckeye Partners (BPL)
• El Paso Pipeline Partners (EPB)
• Enterprise Products Partners (EPD)
• Energy Transfer Partners (ETP)
• Kinder Morgan Energy Partners (KMP)
• Magellan Midstream Partners (MMP)
• Nustar Energy (NS)
• ONEOK Partners (OKS)
• Sunoco Logistics Partners (SXL)
• TEPPCO Partners (TPP),
• Tortoise Energy Infrastructure Partners (TYG) (actually a basic of MLPs)

U.S. Coal MLPs

Hardly green energy, but nonetheless essential and often a substitute for oil. As the world economy improves, demand for coal is aided by rising demand for steel, for which certain kinds of coal are needed. Demand for coal isn’t going away, and its price will likely rise with other energy prices, as it always has.

• Alliance Resource Partners (ARLP)
• Northern Resource Partners (NRP)
• Penn Virginia Resources Partners (PVR)

Conclusion & Disclosure

While it’s more likely that stock prices may retreat in the near term, energy stocks remain among the best long term plays, especially if you are well paid while you hold them with almost junk bond like returns despite their far safer dividends.

Opinions presented are strictly those of the author and of those disseminating these articles or otherwise associated with the author.

The coming articles will examine individual categories and stocks in greater detail.

Disclosure: I have positions in most of the above mentioned investments.

Comments

[Shale Gas:]

An interesting collection of many unknown stocks.

Jun 08 09:11 AM

[C. Hendry:]

Canadian taxes taken from dividends as distributed and subject to increase

Jun 08 09:27 AM

[Dividend Gr...:]

Cliff,

While I am a big fan of most pipeline MLPs, they won't necessarily earn higher profits if prices of oil and gas increase. They earn their money from transporting oil and gas. Very few of them have any exploration and production per se.

I do however like the stability in their distributions, as well as the distribution growth potential in some of the largest pipelines.

Best Regards,

Dividend Growth Investor

Jun 08 10:32 AM

[Uncle Pie:]

This must be an excellent article, since it articulates the investment strategy this writer has been using for some time! Great minds, and all that. You might also look at:
Baytex BTE on the NYSE, 7% yield, long reserve life in heavy oil with upside from development of the Seal prospect.
Canadian Oil Sands Trust, COSWF is the US trading symbol for this Toronto-exchange listed security, is the only pure play on oil sands through its 37% ownership of the huge Syncrude project, which is operated by ExxonMobil's Imperial Oil subsidiary. The dividend has been reduced to a token amount due to the decline in the oil price, but should rise again as the oil price recovers.
Crescent Point Energy Trust, CPGCF is the US trading symbol for this TSX listed item, some would say it's a little pricey but excellent prospects for continued success in the Bakken oil trend. All of these companies have excellent websites with investor presentations you can look at.
This writer owns shares of all of the above.

Jun 08 11:02 AM

[Living4Divi...:]

Nice article, Cliff.

Jun 08 12:43 PM

[Living4Divi...:]

It is better to buy the Oil Comapnies with the oil actually in the ground instead of Oil futures which are highly speculative.

I wrote an article about this titled: How High Will the Price of Oil Go? seekingalpha.com/artic...

Jun 08 12:45 PM

[willydo:]

Cliff,

Good article. I do think the special tax situation required when investors file their income tax should be mentioned, however. (when owning mlp's etc.). Many may favor MLP funds over direct ownership.

Willydo

Jun 09 09:33 AM

[axelrod608:]

Another good article, Cliff. Tell your followers to have a tax preparer that can deal with MLP K-1's if they put money into MLPs.

And, after what happened last year, keep those trailing stops working folks. If/when this rally runs out of steam, another drop like last year's is possible, perhaps likely. It takes decades of divs to make up for 50% losses

Jun 09 09:44 AM

[berloe:]

This market feels like driving to the train station over icy roads. Go too slow and you might miss the train; too fast and you crash. On the other hand, has the train already left the station?
Is there another train coming?

Jun 09 10:33 AM

[whisperonth...:]

C. Hendry is right, but the increase isn't due until 2011, unless they changed it.

Jun 09 10:14 PM

[stonebluff:]

It's Natural Resource Partners, NOT Northern Resource Partners.

Jul 12 03:04 PM

[Chaz380:]

Where can I get more information about "the tax filing implications" of MLPs and K1s.
Thanks
Chaz


On Jun 09 09:33 AM willydo wrote:

> Cliff,
>
> Good article. I do think the special tax situation required when
> investors file their income tax should be mentioned, however. (when
> owning mlp's etc.). Many may favor MLP funds over direct ownership.
>
>
> Willydo

Sep 02 06:41 PM