5 Energy Partnerships Paying 5%

Includes: BPL, BWP, EEP, ETE, ETP
by: The Value Investor

With interest rates near zero the focus of investors shifts to high-dividend yield stocks. This is especially true for the elderly, who are saving for retirement. In the following article I will run through five natural gas limited partnerships, each paying fat dividend yields to investors. These could form a base for every retirement portfolio.

Diversified natural gas basket
An investor searching for yield in stable large natural gas limited partnerships could invest in the following names: Boardwalk Pipeline Partners (NYSE:BWP), Energy Transfer Partners (NYSE:ETP), Buckeye Partners LP (NYSE:BPL), Enbridge Energy Partners LP (NYSE:EEP) and Energy Transfer Equity LP (NYSE:ETE).
Each of these companies pay a dividend yield of 5% or more and has a market capitalization exceeding $5 billion.
The basket comprising an even share in each of the five names would provide a 6.9% yield. Shares are valued at an average of 2.1 times book value and 36 times earnings. Remember that energy limited partnerships by nature do tend to have high price-to-earnings ratio as a result of the direct taxability of profits to individual investors. In reality this translates into much higher cash flows to investors compared with the stated earnings.

(Click chart to enlarge)

Long-term returns
Investors who invested in this basket seven years ago would have seen a 47% price appreciation. This excludes the fat annual dividend yield, which currently runs at 6.9%.
This compares with the SP500 (NYSEARCA:SPY), which returned about 10% over the seven-year period and pays a lower dividend yield. On top of superior returns, the natural gas partnerships do tend to show slightly less volatility in their returns.
However in 2008, the basked showed a dramatic return as the entire market fell of a cliff. On top of that, oil prices fell from a record $147 to lows of $30 in just months, hitting energy related stocks extra hard.

Over the last year gas prices have shown a growing disconnect to oil prices. While oil prices kept on rising, gas prices have fallen some 70% since April 2011. Despite the price collapse for gas the basket still managed to return 1% over the last year vs. 5% for the broader market.

Over the long term, natural gas limited partnerships provide investors with excellent risk-reward ratios as the natural gas partnerships become crucial in the desire of the U.S. to become energy independent.

Margin of safety for retirement
Traditionally, many investors had a sizable bond portfolio in order to comfortably retire. With bond yields being completely insufficient to generate comfortable returns, many investors have fled to equities. Limited natural gas partnerships with their stable long-term demand and favorable federal energy policies toward the future provide the best of both worlds. They pay a yield, which bonds fail to provide at the moment, while having the same upside as the general equity market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.