Income Now, Income Later, part 1

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

My dad became a stockbroker 30 years ago when I was in college.  So it came as a jolt when he recently asked me for investment advice.  “I need some more income from my investments, “ he said.

Like many his age, retirement income was supposed to be in the form of CDs and bank accounts; safe, dependable investments producing interest income.  Today, that approach is a financial dog that just won’t hunt.  Instead, I think the growing US energy industry offers attractive alternatives to anything banks can offer.

Yields Over 7%

Linn Energy (NASDAQ: LINE) produces oil and natural gas from US sources.  The company acquires assets it believes represent safe, long term and predictable sources of gas or oil.  Linn actively works to enhance production from its existing wells to grow revenue and distributions.  The company also aggressively hedges its oil and gas production to reduce income volatility from changing commodity prices. Currently, Linn’s energy production is approximately 55% gas, 45% oil.  With the stock generally moving sideways for the past two years, income is the big attraction.  Current distributions yield 8%.  Distributions generally increase, particularly over the past two years.  Its latest quarterly report shows increasing production, decreasing debt, decreasing expenses and increasing acquisitions.  If Forbes magazine is right, investors might also receive some capital gains on top of the 8% dividend in the year to come.

Enbridge Energy Partners (NYSE: EEP) is an oil and natural gas pipeline company with rising distributions.  This Canadian based master limited partnership pays a 7.8% dividend that has increased annually since 2006.  Earnings have been erratic, but generally trending upward; the stock price has gone up and down.  Currently, Enbridge trades about 18% off its year high.  Return on equity is 14.5% (an improvement over last year) and its PE is around 14.5.  

Earlier this year, the company announced a major upgrade to its Alberta Clipper oil pipeline, which moves oil from North Dakota and western Canada to Midwest refineries.  The company also expanded its natural gas pipeline capacity in the Haynesville gas formation in Louisiana.  Enbridge also plans a pipeline to connect the Utica oil shale in eastern Ohio to pipelines in Michigan.  However, Michigan residents still remember a pipeline spill about two years ago and the State of Michigan thinks Enbridge still needs to finish cleaning up the mess.  While an expense, I don’t see this as a big hit to corporate earnings or dividends.

Lastly, a specialty refining company, Calumet Specialty Products Partners (NASDAQ: CLMT).  I find this firm interesting for a number of reasons.  First, its distribution yield is currently 8.4%.  Second, its product mix ranges from jet fuel to asphalt to solvents to gels used in personal hygiene products.  This diversity represents safety.  Currently, Calumet’s specialty products gross profits exceed those of its fuel products by a roughly 3:2 margin.  Third, the company is growing by acquisitions.  This past 14 months saw three refinery operations added to Calumet’s portfolio, helping reduce the risk of lost revenue should any one refinery shut down.  These acquisitions should also contribute nicely to Calumet’s bottom line.  Lastly, the company is looking to make its own oil from natural gas.  Using cheap Marcellus shale gas, Calumet plans to use Fischer Tropsch technology to custom make oil for its fuel refinery operations.  

Three Common Themes

Besides being energy plays, the above companies have three common themes: First, they are all limited partnerships and pay distributions rather than dividends.  This may prove advantageous if Congress decides to raise taxes on dividends as part of its fiscal cliff negotiations. At the moment, distributions don't seem vulnerable to increased taxation.  Second, they all have slowly increasing distributions.  Calumet’s track record is not as consistent as Enbridge’s or Linn’s, but recent results have been encouraging. Third, their stock price can be erratic.  Calumet has soared this past year, although with some notable dips.  Enbridge declined more than 10%, Linn declined about 5%.  

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Chart courtesy of Yahoo Finance

While I do prefer seeing the price of my investments increase, it may not matter that much for income investors.  After all, if the company keeps paying the distribution and the distribution grows, who cares what the stock price does?

Final Foolish Thoughts

Many retirees face a dilemma: should they invest in safe bank deposits and CDs and derive little income or invest in more risky stocks but at least enjoy some revenue?  I believe America’s domestic energy industry provides a reasonable balance between safety and current income.  For those whose retirement is still several years off, I suggest looking at other investments for their dividend growth potential.  Check out my suggestions in the counterpart to this article at Income Now, Income Later, part 2.

dylan588 has long positions in Linn Energy, Calumet Specialty Products PArtners, and Enbridge ENergy Partners. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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