North American Shale Dividend Guide
At Wealth Daily, we are keenly aware that more and more individual investors like you are taking control of their investments and retirement planning.
And why not? After traditional financial planners and Wall Street advisors utterly failed to protect investors' money during the financial crisis, well, it's easy to see you can do better.
After all, even in the best years, most mutual funds are lucky to give you better than 8% or 10% gains. Frankly, that kind of performance just doesn't cut it — especially after the losses most investors sustained during the financial crisis.
So we firmly believe individual investors can do better than mutual fund managers and financial advisors... much better.
The first step in building a strong portfolio that can grow your wealth now and give you a fantastic income stream in retirement is to own a stable of strong dividend stocks and to reinvest those dividends (i.e. buy more shares with them) for as long as you can.
However, we don't recommend just any dividend stocks...
Sure, you can own the Wall Street dividend standards like Johnson & Johnson or Proctor & Gamble. These stocks have done a phenomenal job of rewarding their shareholders with growing dividend payments.
But these stocks' glory days are behind them.
No investor should count on these companies to grow their dividends like they have in the past.
Rather, individual investors who want to grow their wealth at a market-beating pace need to focus on companies that are likely to grow and increase their dividend payments in the years ahead.
This strategy might take a little more work and imagination than investing in Johnson & Johnson, but the reward will be getting the retirement of your dreams.
Royalty Trusts: Growth and Income MLPs
Currently MLPs and Royalty Trusts are among the best options for investors who want to secure an outstanding — yet stable — dividend, along with excellent growth prospects for both the stock price and the dividend.
Now, don't worry if you've never heard of these types of income stocks...
Here's a quick explanation, starting with the MLP:
An MLP, or Master Limited Partnership, is a corporate structure where all shareholders are partners in the operation.
To explain this simply, we just need to know that there are two partners in an MLP.
First, there's a general partner, who is responsible for managing day-to-day operations and other affairs — the management team and all the employees of the company — and is compensated based on the venture’s performance.
The other partner is the limited partner, who provides capital. As you might guess, when you buy stock in an MLP, you become one of many limited partners.
You're "limited" in that you won't ever get a call from the company to get your opinion on how to run the company (sorry); but since you provide capital for the company, you get a share of the profits (yeah!).
In fact, MLPs are required by law to pay out virtually all profits to the partners (you!) in proportion to their ownership interest (how much stock you hold).
This is why MLPs pay such high dividends.
Also, an MLP is a tax-exempt corporate structure. That's right — you'll pay taxes on your dividend income at the 15% dividend rate... but the company itself doesn't pay taxes, so it avoids the double-taxation loophole to which most dividends are subjected.
This is another reason MLPs are able to pay higher-than-average dividends (technically called "distributions").
There's just one more point to make about MLPs: They have to derive 90% of their income from activities in real estate, commodities, or natural resources such as mining, timber, or energy production and related activities. So an REIT can be a form of MLP.
But for the most part, when you hear "MLP," you should be thinking of a company that's involved in oil & gas, mining, or timber. What's more, most of the MLPs you'll encounter own and operate oil and/or natural gas pipelines and storage facilities.
There are many excellent reasons pipeline companies make such good MLPs...
Here are just a few:
Pipeline companies don't really compete with each other. They stake out different territories, so overlapping pipelines are rare. That's good for revenue and profit growth... which means it's good for dividend growth, too.
MLP companies don't care about the actual price of natural gas or oil. They are, in essence, a toll road that collects money based on the volume of traffic — and it doesn't matter to the toll operator whether you're driving a Camry or a Camaro.
Many pipelines cross state lines, so they are regulated at the federal level. The Fed likes to tie rate increases to the Producer Price Index, which basically means pipeline companies can raise their fees in line with inflation, so your dividend is likely to rise with inflation. In fact, MLP dividends have risen at 7% annual clip for the last 10 years.
It's pretty easy to see why MLPs make great income investments.
But there's another reason we at Wealth Daily are particularly bullish on MLPs...
The United States and Canada are producing more oil and natural gas than they have since Texas crude production peaked in the 1970s. And it all has to run through pipes to get where it's going.
On the oil side of the ledger, high prices and new technology are helping companies develop previously unattainable oil deposits, like the shale oil in the Bakken and Colorado's Niobrara. And new technologies are making abandoned wells viable again.
As for natural gas, well, there's so much natural gas being produced that prices have plummeted. Some companies are even curtailing production because it's not economical...
But utilities are building natural gas-fired plants as fast as they can and locking in supply at low prices.
And it won't be long before LNG (liquefied natural gas) export terminals are able to ship that gas overseas where prices are significantly higher.
In all, it's estimated that North American oil and gas production will rise by 35% over the next 10 years.
That means new pipelines will be built, and more oil and gas will flow through existing pipes.
And it means MLPs will pay more in dividends.
MLPs vs. Royalty Trusts
A Royalty Trusts were invented by T. Boone Pickens in 1979. His company at the time was Mesa Petroleum. Mesa was having trouble raising enough cash to invest in new production. So Pickens got the idea to bundle a bunch of producing wells as a trust, with profits from the wells distributed to anyone that owned shares int he trust.
For Mesa, it was able to raise cash by selling the future revenue of these wells to investors. Investors were able to get consistent income from established oil production. It was a win-win.
A Royalty Trusts are usually finite entitities, meaning they will dissolve after a stated amount of time, or a stated amount of production. Still, a Royalty Trust pays high dividends, just like an MLP. And in many cases, income from a Royalty Trust is easier to deal with at tax time.
(Some MLPs can be a bit complicated because as a limited partner, you are an owner and get allowances for equipment depreciation. In our opinion, though, this does not in any way make MLPs an unattractive investment.)
Now, if you're ready to start collecting outstanding dividends from North America’s shale boom, here are two of our favorite investments.
One is a Royalty Trust, the other is an MLP.
They each offer excellent current dividends — as well as potential for both the share price and the dividend to move higher in the years to come.
MV Oil Trust (NYSE: MVO)
Market Cap: $293 million
Revenue: $37 million
Shares outstanding: 11.5 million
52-week range: $22.16.74 - $44.38
MV Oil Trust acquires and holds net profits for its trust holders. MV is based in the United States: Austin, Texas, to be exact. The company focuses on the discovery and production of oil and natural gas in the Mid-Continental U.S. (primarily in Kansas and Colorado).
MV receives royalty interests from its properties, and then pays the majority of that royalty income to its shareholders. Altogether, it holds about 1,000 such properties. The Bank of New York Mellon Trust Company acts as Trustee.
The current share price is around $26. The most recent quarterly dividend payment was $0.68, for an annualized dividend of $2.72... but MVO has paid as much as $1.03 a share, so there may be upside for the dividend.
Also, MV Oil Trust does not hedge its production, so there is upside for the stock simply based on rising oil prices.
MV Oil Trust isn’t set to expire until 2026 — or until it has produced 14 million barrels of oil equivalent.
In other words, there is plenty of time for you to enjoy that nice 10% dividend.
At $41.50 a share, MV Oil Trust is close to the midpoint of its 52-week range. Given that it is an unhedged oil play, the stock will perform best when oil prices are rising.
NuStar Energy, LP (NYSE: NS)
Market Cap: $3.9 billion
Revenue: $5.9 billion
Shares outstanding: 70 million
52-week range: $38.43 - $62.64
NuStar Energy is based in Houston, but its business interests range from Texas to the Netherlands and Turkey.
NuStar is focused on oil and transportation operations via pipelines. The company buys refined oil products like gasoline and resells them; it also refines crude oil into asphalt and other refined products.
NuStar also has oil storage facilities. As of December 31, 2011, the company had 66 terminals and storage facilities, with 84.6 million barrels of storage capacity.
NuStar owns 5,480 miles of refined product pipelines in Texas, Oklahoma, Colorado, New Mexico, Kansas, Nebraska, Iowa, South Dakota, North Dakota, and Minnesota — and 940 miles of crude oil pipelines — plus it has two asphalt refineries and a fuels refinery.
In total, NuStar has 8,417 miles of pipeline and can store 98 million barrels of oil.
NuStar was founded in 1999. But best of all for investors, the company has raised its distributions to shareholders for 11 years running.
In 2011, the distribution was $4.74 a share, up from $4.43 a share in 2010.
With that type of growth, NuStar is an excellent choice for the dividend investor.
For further reading, our publication has written an additional report on MLP investments for you to access.
You can download the PDF version here: North American Shale Dividend Guide
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