A stock that outpaces gains of the underlying
- Still paying a 7.7% dividend yield
- Two potential downsides
On April 1st, 2010 I urged my readers to buy a
natural gas company paying a 10.4% dividend.
At the time, natural gas prices were near their year-to-date
lows. Today, prices are off of their lows and my favorite natural gas
investment is still relatively inexpensive.
As a commodity
investor, I focus my time seeking out investments in sectors that tend to
either equal or outpace gains made in the price of their underlying
That’s easier said than done. But this dividend-paying
natural gas company has proven its value these past six months, and has more
than kept pace with natural gas prices.
Since my recommendation, natural gas prices are currently up
about 5%, but my favorite natural gas company is up 14%:
That’s not including the five monthly dividend payments you
would have collected as well.
The company I’m talking about is called Hugoton
Royalty Trust (NYSE: HGT).
With the 14% increase in the share price, the dividend isn’t
quite as attractive as it was on April 1st, but it’s still paying
a trailing 7.7% annual yield.
The next payment will go out to shareholders of record as of
September 30th, with the actual check going out on October
15th. So you still have a few days to pick up shares if you’re
interested in grabbing the dividend.
As I said, it’s a monthly dividend, so if you want to wait
for more of a dip, you won’t miss out on the income by waiting a few weeks.
But with these monthly players, I’d recommend averaging in each month so you
collect dividends all the way along. And reinvest those dividends to enjoy
the miracle of compounding interest.
I’m still bullish on this stock. The reasons are the same
they were six months ago – the downside for a company like this one is
somewhat limited when natural gas prices are this low.
As I said back
“There are only two downsides for this type of
1) If natural gas prices go lower Hugoton would receive
smaller royalties from XTO. [now owned by Exxon (NYSE:
XOM)]. Natural gas prices are already rock bottom, so this scenario
2) If XTO runs out of natural gas to sell, they cease paying
royalties to HGT. But that’s not a likelihood. XTO has proven natural gas
reserves of over 12.50 trillion cubic feet – that’s the equivalent of 100
billion gallons of gasoline – or nearly enough to supply every single vehicle
in the United States for a whole year.”
So that’s my short-term view for this specific company, but
my longer term horizon for natural gas remains bullish as well.
Buying natural gas at $4 per thousand cubic feet is the
energy cost equivalent of paying 48 cents for a gallon of gasoline. Granted,
gasoline is a liquid, and therefore superior to gaseous fuels for obvious
reasons of storage, transport and distribution – but my long term view for
natural gas is that technology will make the liquid-gas dilemma all but
irrelevant. The difference between $3 gasoline and 48 cents for the energy
equivalence in natural gas becomes pure profit when and if the technology
The bigger the spread between crude oil and natural gas, the
more of a profit incentive exists for industry to wrap its head around
natural gas – an abundant and cheap energy resource.
If you’re an income investor interested in energy
investments, you need to look forward to times when natural gas prices dip
below $4 per MCF, and buy shares of companies like Hugoton. It might be worth
your while to wait for shares to dip below $19, and back up the truck if
shares head south of $18.
If you bought shares of Hugoton on my recommendation, I’d
love to hear from you. Drop me a line at [email protected].
I’d also like to hear about your favorite income play in the energy
Have a great weekend,
disclosure: no position as of this writing