2 Energy Bargains with Powerful Yields

05/04/2011 2:36 pm EST

Focus: ETFS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

An ETF aggregating the top master limited partnerships is yielding 6% today, while a Western driller pays better than 7%, writes Doug Fabian in High Monthly Income.


Even if Libya resumes pumping crude at some point, the world is liable to be staring down the barrel of triple-digit oil prices for some time.

That’s because increased demand from oil-hungry emerging markets like China, along with a potentially restricted supply due to the Middle East situation, is a recipe for higher crude prices—and along with that higher energy-income fund prices.

Today, I want you to take advantage of the aforementioned trends with two buy recommendations.

The first is the Alerian MLP ETF (AMLP). This relatively new fund seeks investment results that correspond, before fees and expenses, to the price and yield performance of the Alerian MLP Infrastructure Index. The fund normally invests at least 90% of total assets in securities that comprise the index.

[AMLP has a 6% trailing yield at today's price, just above $16, and those who buy by tomorrow will capture the quarterly distribution due May 13—Editor.]

So, what securities comprise the Alerian MLP index? Here are the Top Ten holdings in the fund as of March 1:

Holding Ticker % of Fund
ENTERPRISE PRODUCTS PARTNERS L EPD 9.44%
KINDER MORGAN ENERGY PARTNERS L.P. KMP 9.15%
ENERGY TRANSFER PARTNERS LP ETP 7.19%
MAGELLAN MIDSTREAM PARTNERS LP MMP 7.13%
PLAINS ALL AMERICAN PIPELINE L PAA 6.68%
ENBRIDGE ENERGY PARTNERS LP EEP 6.67%
ONEOK PARTNERS LP OKS 4.73%
NUSTAR ENERGY LP NS 4.62%
WILLIAMS PARTNER LP WPZ 4.58%
MARKWEST ENERGY PARTNERS LP MWE 4.40%

These holdings represent some of the best energy-sector master limited partnerships (MLPs) out there. The benefit of owning AMLP is that you get exposure to all 25 of the top MLPs in the Alerian Index. That means you essentially are getting exposure to the entire energy-infrastructure segment.

To protect ourselves if we are wrong about the direction of AMLP, let's place a stop-loss order at $15.50.

There are a few things that you should know about MLPs. First, they are structurally different from corporations. MLPs are considered to be aggregates of their partners rather than a separate entity. Perhaps the most distinguishing characteristic of an MLP is that it combines the tax advantages of a partnership with the liquidity of a publicly traded stock.

MLPs allow for what’s known as pass-through income, meaning that they are not subject to corporate income taxes. Instead, owners of an MLP personally are responsible for paying taxes on their individual portions of the MLP’s income, gains, losses, and deductions. This structure eliminates the double taxation generally applied to corporations.

Like regular income-generating securities, MLPs make distributions that are similar to dividends. These distributions generally are paid out on a quarterly basis. Those distributions certainly are good for income-oriented investors, but the capital appreciation that a fund like AMLP is capable of delivering is also a positive.

I also have my eye on another energy income-generating fund, and it’s Enerplus (ERF). Enerplus acquires and exploits crude oil and natural-gas assets.

The company, formerly known as the Enerplus Resources Fund, has property interests in Western Canada, in the provinces of Alberta, British Columbia, Saskatchewan, Manitoba, and Ontario, as well as in Montana, North Dakota, Pennsylvania, West Virginia, Maryland, Wyoming, and Utah in the US.

According to its latest figures, Enerplus holds probable reserves of 110 million barrels of light and medium crude oil, 46 million barrels of heavy crude oil, 14 million barrels of natural-gas liquids, a trillion cubic feet of natural gas and 25 billion cubic feet of shale gas.

There are many things to like about Enerplus here, and one is that it pulled back off of its recent high. If we see a bit more selling in ERF, it really would represent a nice buying opportunity in this well-managed yield hog.

And when I say yield hog, I’m not kidding. The current yield on ERF is 7.3% after today's 3.5% drop to the vicinity of $31 a share.

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