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If you were paying close attention last week, you might have
noticed some of the world's most powerful groups -- who each
have the power to move markets by themselves -- all said the
same thing... albeit in different language.
Translation: There's a bullish case for oil. It's not often
all of these market movers make similar announcements within
such a short time period. That's why I think it's so
important to listen.
After rocketing to nearly $150 a barrel... and then falling
all the way back to $35... the price of oil has been in a
picture perfect bull market, rising past $80 per barrel. And
it's no wonder:
In short, all of the factors that helped push oil to nearly
$150 per barrel in 2008 are still with us today... even
after a nasty recession. I think the economics are simple:
increased demand and shrinking supply mean oil prices
have nowhere to go but up.
Of course, we're income investors, not commodity
speculators. Income is everything to us, and oil prices are
notoriously volatile, even if I think they're likely to
rise. By earning a stream of dividends we can offset some of
the damage if the price of oil doesn't go our way, while
also enjoying fat dividend checks.
That's why I've been hunting for plays that should gain on
rising oil prices... but also pay healthy yields.
I'll be honest, most traditional oil stocks leave much to be
desired. The best choice is French oil giant Total SA (NYSE: TOT).
It pays a
solid 5.5% right now, but the company only makes two
dividend payments per year.
I think investors can do better.
You see, there are plenty of oil companies paying out
frequent -- and high -- yields. But you've likely never
heard of them. That's because these high-yielding oil plays
are in the ranks of small producers.
I'm talking oil producers with market caps of roughly $3
billion or less. In other words, businesses that are just 1%
the size of ExxonMobil (NYSE: XOM). A quick screen pulls up 13 small oil
producers yielding above 7%. Some have market caps as small
as $300 million.
Many of these high-yielding businesses, such as Pioneer
Southwest Energy Partners (NYSE: PSE), are set up as
master limited partnerships -- a tax-advantaged status that
means more cash is available to pay distributions. This
structure is one of the reasons they're able to pay such
high yields.
Most also have other segments of their business besides
production, such as the processing and shipping of crude and/or
natural gas. While this diversification does mean the units
won't move in lockstep with rising crude prices, I think
you'll find their high yields are certainly worth the
trade-off.
Good Investing!
Paul Tracy
StreetAuthority Chief Investment Officer
P.S. - I'm not the only looking for high yields
from small producers. StreetAuthority's foremost income
expert, Carla Pasternak, recently featured a tiny oil
company as her "Stock of the Month" within
High-Yield
Investing.
The jewel she found has never missed, slashed, or cut one
payment in its history. And in the past year, when the price
of oil has leapt from about $40 a barrel to $80 a barrel (a
+100% increase), this oil investment delivered +177.5% total
returns... yet still pays 10.2%.
Follow this link to learn more about Carla's "Stock of the
Month."
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Last Tuesday, the Federal Reserve
announced that it will keep interest rates
unchanged and at record lows -- a sign that,
according to the Associated Press, reassures
investors that the U.S. is committed to spurring
economic recovery: "Oil and gas demand is
expected to increase as economies recover and
businesses hire more workers."
