The Highest Income Yield in Energy Today 

Energy Stocks

Little-to-no yield.

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,
Ian Wyatt

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