Why it’s not too late to buy oil stocks

If you’ve ignored oil stocks so far, it’s easy to think you’ve missed the mark. After all, the great oil run sent producer (and pipeline operator) stocks skyrocketing. That means lower dividend yields and higher valuations for people who decide to tiptoe in now.

But there is a way to “go back in time” and extract 8.1%, 8.7% and even 8.9% dividends from energy stocks. (These are the actual returns of three overlooked funds that I’ll show you in a moment.)

These are the kinds of returns you could only recoup in April 2020, in the midst of the COVID crisis, when oil stocks were on their toes, their depressed prices sending their returns skyrocketing. These days, people who buy these stocks independently or through an exchange-traded fund (ETF) have to settle for a lot less income.

Take the benchmark ETF for space, the SPDR Energy Select ETF (XLE), which owns shares of large producers such as ExxonMobil

XOM
(XOM), chevron

CLC
(CLC)
and Conoco Phillips

COP
(COP).
In March 2020, its yield soared north of 15%! But (no) thanks to the energy rally, it returns just over 3% today.

I’m not telling you this to dissuade you from buying energy stocks now. Far from there! I am writing to tell you that we can still reap big returns from energy without having to buy during a clearance sale and at a discount to today’s prices. The key? My favorite investments: closed-end high-yield funds (CEFs).

Let’s talk about tickers, with these three energy-focused CEFs (8%+ return) I mentioned a second ago:

Energy CEF No. 1: an 8.1% payer that crushes its benchmark

Let’s start with the lowest return of our trio, the “simple” 8.1% Tortoise Energy Infrastructure Fund (TYG), which still pays well over double what XLE gives you.

As the name suggests, TYG invests in companies involved in basic energy generation and distribution infrastructure, which is why Williams Companies (WMB), NextEra Energy Partners

CIP
(NEP)
and ONEOK (OKE) are the main holdings. These actions have helped TYG far surpass even the broader energy sector’s two record years.

TYG is also trading at the biggest discount of our trio, with a market price 17.6% below the actual liquidation of its portfolio. This discount to net asset value (NAV, or the value of TYG’s portfolio shares) means that we are essentially paying 82 cents for every dollar of TYG assets.

Energy CEF No. 2: An 8.7% Payer with Future Prospects

Then the Kayne Anderson MLP Fund (KYN) trades similarly at a 15.3% discount to NAV while offering a slightly higher yield of 8.7%.

This is because of its focus on master limited partnerships (MLPs), which exist to pass income from energy projects directly to investors in the form of dividends. Major MLPs like MPLX (MPLX), Enterprise Product Partners (EPD) and LP Energy Transfer (ET) are its biggest assets.

KYN’s recent comeback, corresponding to the energy market, is not as impressive as TYG’s, but it also means that KYN’s assets have more room to grow if oil prices continue to rise ( or even to remain stable).

The fund also has less exposure to producers, and with MLPs more suited to income seekers, it was not offered at TYG levels. This explains KYN’s higher dividend and opens the door for further upside as investors seek to hedge against the ever-unpredictable energy sector by getting more of their return in cash.

Another thing you may have heard about MLPs is that they send you a complicated K-1 package to report the income you earn from these investments. But you don’t have to worry about that when you buy your MLPs through KYN. The fund sends you a simple Form 1099 at tax time.

Energy CEF No. 3: The ultimate inflation hedge

Finally, there is the GAMCO Global Gold, Natural Resources & Income Fund (GGN), the price of which is reduced by 6% in relation to the net asset value. This could be partly due to its high yield, at 8.9%. Another part is likely due to the fact that GGN is one of the few funds that allows you to buy both gold stocks and energy stocks – two proven inflation hedges – in a single purchase.

And GGN owns leading companies in both fields, including Exxon, Chevron and Shell plc (SHEL) on the energy side and major gold producers such as Newmont Corporation (NEM), Barrick Gold

GOLD
(GOLD)
and Franco-Nevada (FNV).

There’s another reason to consider GGN: its recent performance gives it room to operate.

GGN’s relatively weak returns over the past two years make sense; In 2020 and the first half of 2021, inflation was not a major concern, but rising inflation concerns helped push up fund returns mid-last year.

But the fund has stabilized since, although inflation expectations remain elevated, setting it up for another bull run. Until that happens, you’ll pocket the fund’s rich 8.9% return.

Michael Foster is the Principal Research Analyst for Opposite perspectives. For more revenue ideas, click here for our latest report »Indestructible income: 5 advantageous funds with safe dividends of 7.5%.

Disclosure: none


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Felix J. Dixon