3 Energy Closed End Funds for the Income Investor

Includes: BGR, KED, NTG
by: Michael J. Ray

For the income investor cash flow is king. This is especially true for the retail income investor as oftentimes it is this cash flow that they depend on for living expenses. With interest rates at record lows, the retail income investor is driven out of the safety of certificates of deposit (CDs) and US Treasury bills to find that needed cash flow elsewhere.

Now the issue or concern that must be dealt with is the risk of inflation. It is this inflation that has the potential to crush bond prices and eat away at the principal value of the income inventor’s wealth. To combat this, many investors put their money into assets that will offer better protection for raising inflation. A prime example of this type of asset is the energy sector. The real question is how to invest in the energy sector yet still draw meaningful income. One answer to this question is to invest in closed end funds (CEFs) that not only give one this exposure to the energy market but also provide the income. By investigating the three CEFs listed below, one can get an idea of how to generate that income stream and have exposure to the sector.

BlackRock Energy and Resources Trust (NYSE:BGR): This CEF is run by BlackRock and has been around since the end of 2004. Its total asset value is $925.862M and its management fees are 1.11%. Its main goals have been two-fold: capital appreciation and current income. The fund tries to keep at least 80% of its assets invested in the equities of companies involved in energy and natural resources. So basically any company involved in the exploration, processing, or distribution of oil, natural gas, or other minerals is fair game. To generate the income, which is distributed to shareholders, the fund will collect the dividends and write options on up to 40% of their portfolio. The distributions are issued quarterly and have remained steady over the last year. Currently the fund is distributing $0.405 per share which works out to a yield of 5.55%. Some companies one can gain exposure to by purchasing this fund: large caps such as Halliburton (NYSE:HAL), Occidental Petroleum (NYSE:OXY), and Schlumberger (NYSE:SLB).

Tortoise MLP Fund (NYSE:NTG): The second option might be the Tortoise MLP Fund which attempts to generate its cash flow by investing in midstream energy infrastructure master limited partnerships (MLPs). The fund’s total asset value is $1,501.890M and its management fees are a low 0.53%. Unlike BGR above, NTG does not use an option strategy but is leveraged to maximize its cash intake. Currently the leverage rate is 24% which is generating a quarterly distribution of $0.4075 a share or a 6.37% yield. To make it simpler, an investment in NTG covers the transportation, distribution, and storage side of the energy sector. MLPs, in most cases, must distribute 90% of their cash earnings to investors so they are well suited to an income investor.

Kayne Anderson Energy Dev Co (NYSE:KED): Much like NTG above, KED is a closed-end fund that invests principally in debt and equity securities of energy-related master limited partnerships. The fund’s total asset value is $274.315M. Also the fund uses leverage to help generate its quarterly cash distribution. Currently that effective leverage rate is 20.7% which is generating a 6.7% yield. Unlike NTG though, this CEF has a rather high management fee of 4.21% which isn't ideal. To offset this negative, the fund does have some unique characteristics that make it worth looking at. One such item is that 52% of the assets invested are done with privately held MLPs. KED is basically providing access to private investment opportunities that are not available to retail investors. Secondly, the fund trades at a deep discount when compared to its net asset value (NAV). Currently the price is at a 14.7% discount. To sum it up, the fund offers a competitive yield and a chance that the share price could appreciate to its NAV, giving the investor a healthy return.

By investing in the above three CEFs one can generate a competitive income stream while being exposed to the energy sector. Although these CEFs are not without risk, one would assume that they would perform better than an investment in the traditional bond market in an inflationary period.

Disclosure: I am long BGR.