Jared Cummans: Income investors groaned at the news of the Fed’s recent decision to hold rates in their near-zero rate rut until late 2014. That could mean nearly three years until we see an uptick in interest rates which points to three years of scrapping for steady income around markets as interest rates of 0.25% are less than enticing for most investors. But for those who live and die by dividend yields, there are still a number of options available, especially in the commodity space. Investing on the equity side of commodities can offer low correlation (though not nearly as low as the direct commodity itself) while providing a handsome income stream [see also 12 High-Yielding Commodities For 2012].
At first glance, it can be easy to overlook dividend yields when making investment decisions. For example, seeing a 2% yield on a fund may seem minuscule, but consider this; a portfolio with a baseline investment of $100,000, earning an average 2% annually off of dividends will appreciate to approximately $122,000 in 10 years, and nearly $150,000 in 20 years, assuming the gains are re-invested and no appreciation in stock price. In fact, a recent study conducted by Standard & Poor’s revealed that dividend components were responsible for 44% of the total return in the last 80 years of the S&P 500′s history. From 1950 until 2010, an investment of one dollar with dividends and reinvestment would have performed eight times better than a dollar invested in a non-dividend fund; that dividend invested dollar would be worth roughly $500 today
With that in mind, investing in the dividend players of the commodity space may make for a safer, more predictable method of obtaining exposure to this vital asset class. Below, we outline five Master Limited Partnerships (MLPs) that invest in the commodity space. MLPs have long been known for their juicy yields, though investors should be aware that some will issue a K-1 which can be a headache come tax season. That being said, the following five commodity investment options have yields that make them hard to ignore [see also Dividend Special: Top Companies In Every Major Commodity Sector]:
Kinder Morgan Energy (NYSE:KMP) – 5.3%
Kinder Morgan operates in the energy business with pipelines dedicated to both crude oil and natural gas. Based in Houston, the firm has over 8,400 miles of crude pipelines as well as 15,500 miles of the same dedicated towards natural gas. With natural gas prices sitting at lows not seen for some time, KMP could have a nice growth opportunity to add on to its handsome yield of 5.3%. The stock has a market cap just over $29 billion with an average volume topping 650,000. The key financials of the fund look relatively sound, with a positive earnings growth as wells as strong profit margins. Just over 7% of total shares are held by insiders while about 17% are held by institutions, meaning that this fund is a favorite for individual investors. As to be expected, this MLP has an alarmingly high payout ratio that tops 2,000% and should be taken into account before investing [see also Analyzing Five High Yielding Oil & Gas Pipeline Stocks].
Enbridge Energy (NYSE:EEP) – 6.7%
Enbridge has a lot in common with Kinder Morgan; both are based in Houston and derive their main profits from oil and gas pipelines across the country. Enbridge, however, is a bit smaller, with crude pipelines totaling to 5,100 miles and gas pipelines adding up to 8,400. The stock has a total market cap of $8.7 billion and is traded over 800,000 times daily, giving it a slightly better liquidity than the aforementioned security. EEP’s financials look relatively solid, though the figures are not quite as rosy as those of KMP. The stock, which yields 6.7%, has a payout ratio of 115%, which may be favorable to other equities that appear on this list [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].
Terra Nitrogen Company (NYSE:TNH) – 7.5%
Terra Nitrogen will represent a smaller play, but it also offers exposure to a completely different sector. When most people think of MLPs, they automatically assume that the firm is based in energy. Terra Nitrogen, as its name would suggest, is actually a member of the agricultural chemicals segment. The firm garners its revenues from the production and sale of nitrogen fertilizer for agricultural and industrial applications. The stock has a relatively small market cap of just under $4 billion though its has a nice EPS of $14.17. TNH has a yield of 7.5% with a payout ratio around 81%, which may be a much more sustainable figure than other MLPs. It should be noted, however, that over 75% of total shares are held by insiders, which may or may not turn some off to investing in this commodity MLP [see also Invest Like Jim Rogers With These Three Agriculture Stocks].
Penn Virginia Resource Partners (NYSE:PVR) – 8.0%
PVR is another MLP that strays from the norm of strictly oil and gas production. Instead, this firm focuses on the production of coal as well as the processing of natural gas. It operates in two different segments, with one dedicated to both coal and natural gas. The coal segment of the firm has proven reserves of over 900 million tons while the natural gas half is home to nearly 4,200 miles of pipelines. PVR as a stock has a market cap of $1.8 billion but is still relatively liquid with its average daily volume sitting around 470,000. The stock has lost around 3.5% in the trailing year, but its massive yield of 8% has more than made up for it [see also 25 Ways To Invest In Natural Gas].
Natural Resources Partners (NYSE:NRP) – 8.4%
The final component of this high-yielding list comes in the form of a pure coal company. The firm, which operates out of Houston, has proven reserves of over 2.3 billion tons with around 228 million tons of aggregate reserves. As for the stock, NRP has a market cap of $2.8 billion to go along with its massive yield of 8.4%. It should be noted that the firm has a current P/E ratio of 25.71, which may make it overvalued by the standards of many. NRP has also lost around 25% in the trailing year; a blow that was only softened, not erased, by its massive yield. It simply goes to show you that the juiciest yields are worthless if the stock is unable to perform well. The stock features a payout ratio of 210% and over 42% of its shares are held by insiders [see also Three Commodities Dividend Lovers Must Own].
Related: Alerian MLP ETF (NYSEArca:AMLP)
Written By Jared Cummans From CommodityHQ Disclosure: No positions at time of writing.
CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.