High Yields on the High Seas

06/13/2017 2:50 am EST

Focus: ENERGY

Tim Plaehn

Investment Research Analyst, Investors Alley

On the three year anniversary of The Dividend Hunter, income expert Tim Plaehn reviews his portfolio holdings, including two high-yielding limited partnerships in the shipping and storage industry.

Ship Finance International Limited (SFL) owns a diverse fleet of shipping vessels, which are leased on long-term contracts to shipping companies.

Over the last 13 years, the tanker fleet has aged out and been sold off. At the same time, Ship Finance acquired dry bulk carriers, container vessels, car carriers, chemical tankers, drilling rigs and offshore supply vessels, diversifying its fleet.

The company has paid a dividend every quarter since the IPO. The dividend was reduced by 50% during the 2007 to 2009 financial crisis and stock bear market.

Since coming out of that recession, the dividend has grown by 50%. The various shipping markets are extremely volatile, with shipping rates sometimes rising and falling rapidly.

With a focus of strong financial management and using long-term contracts, Ship Finance has produced stable and growing results throughout its history. While the share price is lower than when I first recommended SFL in 2014, the stock has paid 28.2% in cash dividends. The stock currently yields 13.4%.

This is a company with a stable, high free cash producing business combined with an extremely volatile share price. As long as the cash flow remains strong, this is a great stock to buy when the share price swings down.

My rule of thumb is to consider adding shares whenever they drop below $14. In a world with strong economic growth and rising shipping rates, SFL could be worth $20 per share.

Golar LNG Partners LP (GMLP) owns and operates full or partial ownership in a fleet of six liquid natural gas Floating Storage and Regasification Units and four LNG Carrier ships, which are are leased on long-term contracts to counterparties.

GMLP was spun-off by Golar LNG Limited (GLNG) in 2011. GLNG and GMLP have the classic general partner/sponsor and controlled publicly traded MLP arrangement. As the sponsor, GLNG acquires new assets, markets them, and completes the leasing process.

Since its IPO, GMLP has steadily increased the quarterly dividend. Between now and 2018, enough new LNG production facilities will come on line to increase LNG shipping demand by 50% to 60%.

This is a double-digit yield stock, which should grow its dividend because it operates in an energy sub-sector with strong growth prospects. In 2016, the cash flow coverage of the dividend grew each quarter.

This is a stock with a share price that moves in correlation with the rest of the energy sector, as the market only seems to watch the price of crude oil. Adding shares on the dips will produce a very nice income stream. This is a Form 1099 reporting MLP, so tax reporting is not an issue.

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