A yield hound's delight
I'll admit it. I have evolved into a complete yield hound. I love corporate bonds with juicy yields of near 10%. I also love dividend paying preferred and common stock. When I purchase stock in a company, I become a part owner of it. As an owner, I demand that my company share at least a little of its profits with me. Is that too much to ask? I personally don't think so.
By focusing on yield instead of growth I wil almost certainly miss out on the next monster 100 bagger that most investors dream of. On the other hand, I will generate real cash earnings for my portfolio and I probably won't get demolished either if the growth and multiple expansion that others are looking for never materializes.
This week's Barrons contains an excellent article on a type of investment that pays excellent dividends right now, MLPs. Master Limited Partnerships, MLPs for short, are companies in the real estate or natural resources sectors that receive special tax treatment from the U.S. government in exchange for paying out a larger percentage of their earnings to investors as dividends. OK, technically their payments aren't dividends, they are "income distributions" to "unitholders." There is an important distinction between the two as far as the IRS goes. Anyone who is considering purchasing MLPs, should give serious though to doing so through an IRA instead of in a regular account.
Anyhow, the Barron's piece spoke highly of a sub-sector of the MLP universe, natural gas pipelines. The author likes natural gas pipelines because they are less impacted by fluctuations in the price of oil and gas than E&P (exploration & production) companies. Furthermore, they have valuable assets that government regulation turns into near monopolies.
Though I don't own any of the companies that the author mentioned in the article, I like pipelines as a segment and I have added the stock of a number of pipeline operators to my and my wife's real world IRAs over the past year, including Boardwalk Pipeline Partners (BWP), Kinder Morgan Energy Partners (KMP), & Magellan Midstream Partners (MMP). I also own Lakehead Pipeline's (a division of Enbridge Energy Partners LP (EEP)) 7% 2018 bonds that sport a YTM of around 9%.
The two specific companies that the author of the article seems to like best are Williams Pipeline Partners (WMZ) which currently yields 7.2% and Energy Transfer Equity (ETE) which sports a 8.7% yield.
Williams Pipeline Partners is relatively small (a market cap of $367 million) and new (it was created in 1/08) limited partnership that owns a 35% interest in a pipeline that transports nat gas from New Mexico to the Pacific Northwest. It's the only interstate pipeline operator with operations in Boise, Portland, and Seattle. Williams Company (WMB), another attractive company that I recently added to my CAPS portfolio, owns the other 65% of the pipeline. Best of all, WMZ has virtually no debt. The MLP analyst at Stifel Nicolaus believes that there is a good chance that Williams Companies, WMZ's creator, will place additional assets in it in the future to help boost its returns.
Many analysts value MLPs based upon their "coverage ratio", which is equal to their distributable cash flow per unit divided by their distributions per unit. If a company's ratio is larger than one, it can continue to pay distributions at its current level. The Stifel Nicolaus analyst estimates that WMZ will have a coverage ratio of 1.1 in 2009 and 2010, so it shouldn't have to cut its distribution.
Energy Transfer Equity is the majority owner of Energy Transfer Partners, a pipeline operator in Arizona, Colorado, Louisiana, New Mexico, Texas, and Utah. The company also stores, treats, and processes nat gas. Morgan Stanley's analyst is very bullish on ETE and she believes that it will increase its distribution very rapidly after the new pipeline that it is building to transport gas from the Haynesville Shale on the Texas-Louisiana border is completed in 2011. The addition of more pipeline assets will enable the company to reduce the commodity price risk that is associated with processing.
While I don't currently own either WMZ or ETE in real life, I have added both to my CAPS portfolio.
Juicy Yield Play