Multi Limited Partnerships are a hot topic for today's income investor. The high yield and dependable business model provides safety of principal as well as good income. With the global markets in turmoil, especially Europe, retirees need some assurance of current and future income. One of the better MLPs is Linn Energy (LINE).
Linn Energy, LLC, an independent oil and natural gas company, engages in the acquisition and development of oil and gas properties. The companys properties are primarily located in the Mid-Continent, the Permian Basin, Michigan, California, and the Williston Basin in the United States. As of December 31, 2011, it had proved reserves of 3,370 billion cubic feet equivalent of oil and gas, and natural gas liquids, as well as operated 7,759 gross productive wells. The company was founded in 2003 and is headquartered in Houston, Texas. (description from Yahoo Finance)
I try to rebalance my portfolio by sector, similar to the S&P500 as represented by the SPY ETF. I have been underweight energy sector stocks for the past several years. Each time I would try to buy an oil company, a problem would occur such as the BP oil spill and I would cancel my order. Last year, I decided after consultation with the dividend growth investors on this board to buy an energy MLP for my energy sector allocation. However, when I checked with my wife (who does the taxes) she stated that she would not do k-1 tax forms. I have been looking at several alternatives to this including Kinder Morgan Management LLC (KMR) and Enbridge Energy (EEQ) which I could place in my IRA without worrying about UBITI and k-1 tax forms. However, I didn't like the dividend payments in shares, rather than cash.
Recently, Linn Energy formed a corporation and issued shares under the name LinnCo LLC (LNCO). An excellent write up by Todd Johnson concerning this stock can be found here. From my standpoint, LNCO shares solved my problem of adding an energy stock to my portfolio. I was underweight by 9% of my portfolio before purchase and only 4.5% after adding this stock.
The company recently announced the current dividend at $.71 quarterly per share for a current yield of 7.2%. Shares of LNCO track LINE partnership units 1 for 1 with a slight discount to partnership units due to taxes withheld for corporate taxes. So far I am quite pleased with the addition and prospects for future stock appreciation and dividend growth are good (see Bret Jensen's write up on it here).
Being retired since 2000, I need a dependable source of income for expenses, while security of principal is paramount. It can be seen from the chart above that the stock holds up fairly well, except for the 50% drop in 2008 during the Great Recession. There has not been a great deal of appreciation, but I have run a dividend reinvestment spreadsheet to see how the total return for the past 5 years has been.
|Stock||Date of reinvest||Div Rate||# Shares||Dividend||Drip price||# Shares pur||Total Value||Current Yield|
In addition, I graphed these results.
It can be seen from the chart that as the stock price fell, the distributions held up and actually increased. There has been a 5.6% 5-year dividend growth rate, although it does not qualify as a Dividend Challenger, due to many quarters of constant rate (2008-2010). I was impressed with the minimum yield of 6.4% with all yields after 2007 above that level.
Conclusion: For the retiree it is important to have a steady stream of growing dividends to supplement social security and pension income. By studying the market over the past 10 years, I have found that a good sector to produce these steady returns is the energy sector. Before you invest in this new issue of stock, you should thoroughly investigate all ramifications of these shares of Linn Energy to understand what you are buying. I am pleased with them so far.
Disclosure: I am long LINE.