A Search for Dividend Investments

 | Jul 24, 2013 | 12:00 PM EDT
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We dividend investors are running out of bargains. As the big indices march to new highs, it looks like that 5% correction in the S&P is all we are going to get.

Right now, the places I look to for yield are pretty dry. REITs and pipelines have both bounced. Many are now more than fairly valued. Utilities are OK. Blue chip consumer staples have long since run up. The bigger oil and gas companies are fair, but iffy. There just aren't many bargains for income hunters.

One exception is the upstream master limited partnerships. Based on both technicals and distribution yields, there are great bargains to be had. We can find in this industry 9 to 10% distribution yields in something which produces real assets.

For those who want to venture into upstream MLPs, know that valuing them is awfully difficult. The most talked about metric is distributable cash flow, or DCF, but that doesn't equate to earnings. And earnings metrics based on generally accepted accounting principles are not useful at all. In light of this, most investors experienced with MLPs just use distribution yields and technicals in deciding when to buy.

Now is a good time if you like upstream MLPs for their income. Earlier this month, Linn Energy (LINE), which is structured as an MLP, announced that it was being informally investigated by the Securities and Exchange Commission. This caused the stock to plunge some 30%.

Take that as a Macondo-like event, but without the actual oil spill. Like Macondo, the effect on equities was broadly felt. BP (BP) was hit the hardest but the others were down big as well. Back then, investors could have picked among the discounted rubble. Or, they could have just bought BP, which was cheap but came with headline risk. Such is the situation with Linn today.

Let's look at the technicals of the three best upstream MLPs and start with Linn.

Linn has bounced big from its traumatic low. But at $27.60 with a yield of 10.5%, it is still hugely discounted. Keep in mind that it is also the epicenter for the huge downward move and the subject of the SEC's informal investigation. That being said, this chart looks very promising. It looks to have bottomed out and has overcome its first ceiling.

 Let's move to Vanguard Natural Resources (VNR), which is my favorite upstream MLP.

 It is less discounted than Linn, with the drop shallower and the upswing steeper. But it still yields a very respectable 8.83%.

 Finally, let's peruse BreitBurn Energy Partners (BBEP).

This drop looks more like a steep pothole. For unit holders the pain was swift and there was little upside resistance after the fall. Although that great bargain window seems to have closed, BreitBurn can still be picked for a yield of 10.5%. Be careful with this one; we should see a secondary offering by the end of this year.


 It should always be mentioned that these upstream MLPs are risky. They are like royalty trusts that can acquire. But to do so, they lever up and often issue equity. They don't typically have exploration budgets but pay most cash flow as distributions. Upstream MLPs aren't your typical energy corporation nor are they like pipeline MLPs. They are a bit riskier, but the income reward is also better.

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