On April 1st, 2010 I urged my readers to buy a natural gas company paying a 10.4% dividend.
At the time, natural gas prices were near their year-to-date lows. Today, prices are off of their lows and my favorite natural gas investment is still relatively inexpensive.
As a commodity investor, I focus my time seeking out investments in sectors that tend to either equal or outpace gains made in the price of their underlying commodity. That's easier said than done. But this dividend-paying natural gas company has proven its value these past six months, and has more than kept pace with natural gas prices. Since my recommendation, natural gas prices are currently up about 5%, but my favorite natural gas company is up 14%:
That's not including the five monthly dividend payments you would have collected as well. The company I'm talking about is called Hugoton Royalty Trust (NYSE: HGT).
With the 14% increase in the share price, the dividend isn't quite as attractive as it was on April 1st, but it's still paying a trailing 7.7% annual yield. The next payment will go out to shareholders of record as of September 30th, with the actual check going out on October 15th. So you still have a few days to pick up shares if you're interested in grabbing the dividend.
As I said, it's a monthly dividend, so if you want to wait for more of a dip, you won't miss out on the income by waiting a few weeks. But with these monthly players, I'd recommend averaging in each month so you collect dividends all the way along. And reinvest those dividends to enjoy the miracle of compounding interest.
I'm still bullish on this stock. The reasons are the same they were six months ago - the downside for a company like this one is somewhat limited when natural gas prices are this low. As I said back then: "There are only two downsides for this type of company."
- If natural gas prices go lower Hugoton would receive smaller royalties from XTO. [now owned by Exxon (NYSE: XOM)]. Natural gas prices are already rock bottom, so this scenario isn't likely.
- If XTO runs out of natural gas to sell, they cease paying royalties to HGT. But that's not a likelihood. XTO has proven natural gas reserves of over 12.50 trillion cubic feet - that's the equivalent of 100 billion gallons of gasoline - or nearly enough to supply every single vehicle in the United States for a whole year."
So that's my short-term view for this specific company, but my longer term horizon for natural gas remains bullish as well.
Buying natural gas at $4 per thousand cubic feet is the energy cost equivalent of paying 48 cents for a gallon of gasoline. Granted, gasoline is a liquid, and therefore superior to gaseous fuels for obvious reasons of storage, transport and distribution - but my long term view for natural gas is that technology will make the liquid-gas dilemma all but irrelevant. The difference between $3 gasoline and 48 cents for the energy equivalence in natural gas becomes pure profit when and if the technology becomes available.
The bigger the spread between crude oil and natural gas, the more of a profit incentive exists for industry to wrap its head around natural gas - an abundant and cheap energy resource.
If you're an income investor interested in energy investments, you need to look forward to times when natural gas prices dip below $4 per MCF, and buy shares of companies like Hugoton. It might be worth your while to wait for shares to dip below $19, and back up the truck if shares head south of $18.
Disclosure: Author holds no position as of this writing