The energy sector is the hottest in commodities today, says Richard Lehmann in this exclusive interview with MoneyShow.com, and the preferential tax treatment of these two plays make them especially attractive.
Richard, a lot of people are looking for income. Do you see anything in the energy sector?
Absolutely. This is one of the components of the model portfolios that we recommended to individual investors. In fact, we recommended a 20% allocation of their income investments in this particular area.
There are two varieties of instruments that we favor. One is the Canadian energy corporations, which are production companies that pay very high dividends. These are ideal investments, especially for IRA accounts, because of the fact that the Canadian government withholds 15% tax on nontaxable accounts, but they do not withhold on the IRA accounts, so you have a 15% boost in your return right away. So, this makes them attractive.
Do you have any examples for us?
Penn West Energy (PWE) is the one that we’re recommending right now. This is the largest oil and gas exploration company in Canada. It’s a multibillion-dollar company.
They have over seven years of reserves and they have a low distribution percentage of their free cash flow…and yet they have over 6% yield, which is very attractive moving forward.
Is the 20% that you’re mentioning reserved in your portfolio, is that a little bit aggressive?
No, we don’t feel that. Again, we’re saying that 60% or 70% of your investments are in income securities. It would mean about 14% are in this energy area.
And again, the idea here is to diversify yourself over a variety of income drivers. For example, interest rates obviously are an income driver. The stock market itself is an income driver. Real estate can be an income driver, and commodities are. Specifically oil and gas, I think, is the strongest sector in commodities today.
Other than PWE, do you have another one that you would recommended?
Yes, for taxable accounts, the best are these limited partnerships, which are all New York Stock Exchange-listed. There are, for example—we just recommended a company which had an unusually high dividend rate. It was paying out over 12%, which makes it sound like a really dangerous secondary.
It’s called Navios Maritime Partners (NMM). They are basically a ship-charter company and their average charter is under a fixed contract for four and a half years.
Now that business generally has a real negative outlook, because world trade is slowing down, and therefore the first place you’re going to see that is in terms of products moving across the oceans. But because they have most of their ships tied up in long-term contracts…their dividend is fairly secure in that respect.
So, the payout rate here is phenomenal, especially when you consider the fact that because it’s a partnership, it’s not subject to taxation. It’s a return of capital for income-tax purposes.
Richard, do you own PWE or NMM personally or professionally?
I own both of them, yes, and I have them in my clients’ accounts as well.
Stock AnalysisA summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
EconomicsWe share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
Options & FuturesInvesting during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
Investing BasicsHeld onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
EconomicsWill remaining calm and staying long present significant risks to your investment health?
Stock AnalysisIs DKS a bargain here?
Investing NewsA third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
Stock AnalysisHome Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
Stock AnalysisYelp investors have had reason to be happy recently. Will the good spirits last?
Stock AnalysisWalmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>