The price of oil continues to rise. A barrel of oil breached the $100 mark early last week and is now inching its way past $106 - its highest point since May. Fears about Iran seem to be the catalyst this time. The world's third-largest oil exporter is threatening to withhold oil deliveries and block the Strait of Hormuz, through which one-fifth of the world's oil flows, in response to the recent stand-off between Iran and western countries about Iran's nuclear program. As tensions mount, oil prices are escalating.
With no end to this stalemate in sight, now is the time for investors to turn those skyrocketing oil prices into income. As a possible embargo on foreign oil imports looms, U.S. oil and gas producers are becoming more valuable. To profit from them, investors should turn to the energy companies that pour a healthy portion of their earnings back into dividends.
Oil and dividend stocks are both thriving at the moment, so it only makes sense to combine the two. And one of the best ways for income investors to earn a hefty paycheck is through Master Limited Partnerships, or MLPs. Like regular stocks, MLPs offer investors - or in this case limited partners - payments that are similar to dividends, only taxed differently. Because they are partnerships, MLPs aren't subject to state and federal income taxes. The funding costs are relatively cheap when compared to a regular dividend stock.
And yet, some MLPs can generate income with even the highest yielding dividend stocks. It's just a matter of finding the right ones. With that in mind, here are four U.S. energy MLPs that yield more than 7%. Each company boasts a healthy bottom line already, and should continue to generate income as oil prices rise. As they generate income, so too will their shareholders.
Linn Energy (LINE): This independent oil and gas company develops and acquires oil and gas properties across the U.S., including in Oklahoma, Louisiana and California. The master-limited partnership offers a generous 7.5% yield, with a quarterly distribution of $0.66 per share. Having more than doubled its payout over the last six years, and given that the company has increased its annual earnings by an average of 40% for the past five years, there's plenty of room for Linn Energy to grow.
Boardwalk Pipeline Partners (BWP): In 2010, this natural gas transporter carried approximately 10% of the natural gas supply in the U.S. The company owns more 14,000 miles of pipeline that spans four states and serves numerous others, and has a net income of $220 million. That's why Boardwalk recently upped its quarterly dividend to $0.53 per share - a yield of 7.8%.
Energy Transfer Partners (ETP): The Texas-based natural gas company fell short of earnings expectations last week, but still posted revenue that was 25% higher than the same quarter a year ago. The MLP still has a distribution yield of 7.5% and a whopping $3.58 annual dividend. Energy Transfer's average dividend yield over the last five years is 7.4%. Priced at $47, Energy Transfer is currently trading well below its 52-week high of $55.50. With earnings in 2012 expected to rise to $2.31 per share from $1.55 last year, it's unlikely Energy Transfer is going to cut back on its quarterly distribution to shareholders anytime soon.
Inergy (NRGY): Though the 15.7% yield is eye-popping, it's probably unsustainable. But Inergy does have a strong dividend history since it began paying a dividend in 2001. In fact, the company's yield hasn't dipped below 7% in nearly five years. That's because Inergy is one of the leading propane gas retailers in the U.S., and also operates a natural gas storage and transportation business. While the stock has lagged in the past year, as it tracks natural gas prices which have been crushed of late, Inergy's earnings per share are expected to grow 27% over the next year as natural gas begins to show some signs of life. That should inject some life into the stock price, and prevent the superhuman dividend from falling too far.
In a time when 10-year Treasury notes are yielding little more than 2% - their lowest yield in over 30 years - dividend stocks are a far profitable alternative for income investors these days. S&P 500 stocks paid $240.6 billion in dividends last year - the most since 2008.
Now, with oil on the rise and natural gas starting to bounce back, it's also a good time to invest in energy. So finding energy stocks that pay dividends is a way for investors to take advantage of two fast-moving trends.