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Crude Realities: Capitulation?

08/27/2015 9:00 am EST


Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

The price of crude oil traded to new lows based on growing concern about global growth prospects, coupled with new supply from Iran, suggests income expert Bryan Perry in Dividend Investing Weekly.

The bluest of blue chip energy stocks buckled under the selling pressure to where the situation is rapidly taking on the look and feel of a sector under total capitulation.

Every attempt to buy the dip has only been met with yet another trapdoor-like sell-off that now has numerous former energy sector darlings evaluating whether to continue as going concerns.

Stocks of many prized oil companies have lost as much as 80% of their boom period highs and it will be no surprise that some previously formidable market leaders will file for bankruptcy.

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying, "The time to buy is when there's blood in the streets."

This is contrarian investing at its heart: the strongly held belief that the worse things seem in the market, the better the opportunities are for profit.

Based on corrections of many other sectors during the past 30 years, the energy sector is right about at a level of capitulation where investors that have available buying power should be giving serious thought to crafting a defined portfolio of dividend-paying energy stocks that have been unduly hammered by the wholesale sell-off.

I suggest targeting the stocks of oil pipeline Master Limited Partnerships (MLP), the toll takers of the energy business.

Whether oil prices are up or down, the pipeline operators are much more tied to end-user demand or how much oil is pumped through their pipeline networks.

The list of America’s top-tier pipeline operators that are truly on sale as a result of being sold off in sympathy with the sector includes:

Kinder Morgan (KMI)—yield 5.91%
Enterprise Products Partners LP (EPD)—yield 5.36%
Williams Cos. (WMB)—yield 4.60%

We don’t know where the bottom is for oil prices. But we can know with a fairly high level of certainty that these three market leaders will survive and be in a position to further dominate the energy transfer space going forward.

Buying equal amounts of each MLP and the tax-favored benefits of owning MLPs provide an investor a blended tax-free yield of about 5.5% or roughly 9% for those in the highest 43.5% tax bracket for ordinary income.

It is a rare occasion when the best of the best in any given sector trade at discounts of up to 50% from market highs and pay out attractive dividend yields.

If there isn’t blood on the streets in the energy patch, then we’re awfully close. Maybe now is the time to think and act like a Rothschild.

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