That’s the downside to an up market.
Traditional energy – oil and natural gas – has been the up market this year.
Even after the recent pullback, oil prices are still up 21%. Natural gas prices are up 57%.
No surprise here: the companies that wrench these commodities from the earth and bring them to market have been the big winners in 2022.
Among the big wrenchers, Chevron (NYSE: CVX) shares are up 29% year to date. Exxon Mobil (NYSE: XOM) shares are up 46%.
Many oil and natural gas companies have had a good run. Their popularity has aroused a bit of a conundrum, though, for new investors, particularly new income investors.
Where do I get yield?
Both Chevron and Exxon Mobil yield around 3.7%, and these are two of the highest yields in the sector. Warren Buffett’s favorite energy company, Occidental Petroleum (NYSE: OXY), is a no-go for an income investor with its 1% yield.
More income-astute investors are turning to the pipeline companies in search of income.
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It makes sense. These companies have relatively stable businesses. Oil and natural gas must be transported and stored regardless of market price. These pipeline companies frequently lock-in their customers with fixed-rate pricing (a toll, you could call it).
Best of all, these companies offer at least twice the yield, if not more, than a Chevron or an Exxon Mobil.
Plains All American Pipeline (NYSE: PAA) is priced to offer a 7.5% starting yield. Energy Transfer (NYSE: ET) is priced to offer 7.8%. You can even find a starting yields as high as 8.6% with MPLX (NYSE: MPLX).
But, we do have a consideration with these companies.
They’re organized as master-limited partnerships (MLPs). They are pass-through entities, which means they must distribute at least 90% of their income to their investors (unitholders).
The MLP structure works well to produce steady, high-yield income. It works less well at tax time.
MLP investors receive a Schedule K-1 instead of a 1099-DIV. The K-1 requires the tax preparer to allocate several numbers to several various slots on the tax return.
K-1s are a hassle for tax professionals. They can be a nightmare for the do-it-yourself tax preparer.
What’s more, and I know this through experience, K-1s frequently arrive late, even after the April 15 filing deadline.
Another tax consideration occurs if you hold an MLP in a retirement account. MLP income over $1,000 annually is generally taxable.
But don’t despair. You have another option.
You can capture the high-yield income these pipeline MLPs produce while leaving behind the accompanying tax headaches. You even pick-up the added risk-reducing benefit of diversification.
The Alerian MLP ETF (NYSE: AMLP) is exchange-traded fund that owns 20 of the largest pipeline MLPs. The Alerian fund issues a 1099-DIV at the end of the year instead of the cumbersome Schedule K-1.
You can file taxes on time at less cost. You can hold the fund in a retirement account without worrying about a tax liability.
Best of all, you sacrifice little for the added convenience.
The Alerian fund offers a 7.6% starting yield for new investors.
That’s a darn good yield for investing in one of the better performing sectors of 2022.
Yours in Wealth,