Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
Natural Gas Is the Future
04/21/2010 12:00 pm EST
Richard C. Young, editor of Intelligence Report, says natural gas will be a big part of US energy demand in the future, and he recommends a closed-end fund to invest in it.
Within two decades, the US Energy Department expects shale gas to meet half of US gas demand. This forecast will prove far too modest. I look for natural gas from shale to be the bridge for solar and wind power. In combo, a smarter grid and the switch to compressed natural gas and to electric cars will lead to America's energy security.
I view pipeline operators as cash generators for your portfolio. The rise or fall of fuel prices does not affect the revenues of most pipeline companies. They charge the same amount of money to transport an $80 barrel of oil as they would a $145 barrel of oil.
Most pipeline companies are organized as master limited partnerships (MLPs), and the fees they charge their customers are regulated by the federal government. Often those fees have inflation adjustments built right in. That gives MLPs automatic protection against loose monetary policies like those currently in effect.
Pipeline companies took a hefty beating during the height of the credit crisis in 2008. When debt markets locked up, hedge funds and growth investors bailed out, tanking MLP prices. The price declines have created yields in the high-single-digit to low-double-digit range. As credit markets continue to thaw, look for investors to continue buying pipeline.
I recommend you buy Tortoise Energy Capital (NYSE: TYY), which targets investments in these critical pipelines. Investing in unique assets adds quality and safety to a portfolio. Entry costs are high. New entrants must secure licenses and access, not to mention build miles of pipeline—all of which makes new competition rare.
Tortoise shares currently yield over 6%, and the fund concentrates on generating income from investments in businesses with stable, recurring income streams. Tortoise attempts to achieve yields similar to those it receives from the MLPs it owns.
An investment in a fund like Tortoise, rather than in individual pipeline companies, may save you some time during tax season and allow broader diversification across geography and product lines. Since it is structured as a corporation, Tortoise also allows investors to buy MLPs in tax-deferred accounts. Tortoise allows you easy diversification across product lines, too. The fund is balanced nearly 50/50 between petroleum and natural gas/propane assets.
Tortoise currently trades at a wide premium to the value of the assets in the fund or net asset value (NAV). You want to wait to take a position in Tortoise until the price trades at or below NAV (currently $22.64; the fund closed below $27 Tuesday, for an 18.6% premium over NAV—Editor). You can check the premium of the fund at www.cefconnect.com. Buy Tortoise when the shares trade at or below NAV.
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