Dear Mr. Berko: We sold our home in 2010, taking back a 7 percent mortgage. That mortgage is being paid off early with a check for $132,000. We'll use $100,000 to buy another house and invest $32,000 in income stocks. We're angry at the low interest rates and willing to take some risks to get a 6 or 7 percent yield. Our stockbroker very strongly recommends the Putnam High Yield Trust Fund Class Y, which yields 6 percent. My wife and I would appreciate any suggestions you have. On a scale of 1 to 10, with 10 being the riskiest, we are willing to take a 6 or 7 risk. Can you recommend a better alternative? — PD, Wilmington, N.C.
Dear PD: It's bloody scary out there because low- and no-yield certificates of deposit have forced investors who can't afford risks to purchase dreadfully unsuitable investments to pay their bills. And we may soon hear a series of explosions when interest rates rise, because managing many treacherous high-yielding investments is like trying to cross a minefield without a map of the land mines' locations. There are some good high-yielding issues I'm comfortable owning, but though they're much less iffy than others, they still make my teeth itch. Energy Transfer Equity (ETE-$17.76), yielding 6.3 percent, is among those I care for and looks attractive.
The petroleum industry is divided into three major sectors (upstream, midstream and downstream), which I discussed in a column last year. ETE is a midstream limited partnership involved in the transportation (pipeline, rail, barge, oil tanker), storing, processing and wholesale marketing of oil, natural gas and natural gas liquids. And now that ETE's ill-advised cash buyout of Williams Companies (WMB-$29.75) turned out to be an empty well, this $39 billion-revenue midstream LP may be a good income and dividend growth investment.
Rather than invest $32,000 in the Putnam High Yield Trust Fund Class Y (PHYYX-$7.33), just purchase $15,000 worth of PHYYX, yielding 5.93 percent (not 6 percent), and then buy 1,000 shares of ETE. ETE has a 6.3 percent distribution. Its distribution has doubled since 2010 and will be raised this year. Though ETE is grossly speculative, I think it's among the best grossly speculative LPs because it may increase revenues, earnings and income annually. PHYYX is a good fund. It offers the safety of diversification, and its share price has remained rather stable in the past six years, though its dividend has declined yearly since 2010. In that same time frame, ETE's dependable midstream business model has enabled management to increase revenues sixfold, nearly triple its net income and better than double shareholders' cash distributions. And whereas PHYYX's income is taxable, ETE's distributions (equivalent to 9 percent pretax) are not subject to ordinary income taxes.
ETE is a big, important company, and management wants ETE to become bigger and more important. ETE owns 7,521 miles of natural gas pipelines and three natural gas storage facilities in Texas, and it owns 12,293 miles of interstate natural gas pipelines, from which ETE wholesales natural gas to utilities, independent power plants, local distributors and industrial users. ETE's business also includes the operation and maintenance of 35,000 in-service natural gas pipelines, 30 natural gas processing plants, 21 natural gas treatment facilities and four natural gas conditioning facilities in Texas, New Mexico, West Virginia and Pennsylvania. ETE also has 2,000 miles of pipelines for natural gas liquids and four NGL and propane fractionation facilities, as well as NGL storage depots. ETE provides gasoline and distillates to its 51 percent-owned Sunoco (SUN-$30.51), a fuel distributor that owns 896 convenience stores and fuel outlets in eight states. And finally, ETE is the general partner of its $26 billion-revenue Energy Transfer Partners (ETP-$41.11), which owns and operates 63,000 miles of natural gas pipelines.
I believe that ETE will be a satisfying and modestly secure income and growth LP, and you should participate in potentially higher revenues, earnings and dividends. Raymond James and Merrill Lynch have downgraded ETE to "neutral." However, Oppenheimer, Morgan Stanley, Fidelity, Goldman Sachs and MFS Investment Management own huge blocks of ETE, and Kelcy Warren, chairman of the board, purchased nearly 3 million shares late last year for between $15 and $18.50. Thomson Reuters, Market Edge, UBS and Goldman rate ETE as a "buy." I do, too.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
Photo credit: Tony Webster