In an effort to further diversify your sources of income in DividendPro, this week let’s turn to a bet on the energy sector.
Vanguard Natural Resources (VNR) is involved in the acquisition and development of oil and natural gas properties in the southern Appalachian Basin, southeast Kentucky, northeast Tennessee, the Permian Basin and west Texas.
Ambitious expansion is nothing new for Vanguard. Since its IPO in 2007, Vanguard grew its reserves by over 608% and increased daily production from 1,931 Barrels of oil equivalents/day (Boe/d) to 12,338 (Boe/d). Today, Vanguard has reserves of 79.3 million barrels of oil equivalent (MMBoe) with 57% oil, 34% natural gas and 9% natural gas liquids, valued at roughly $1.5 billion.
But let’s not forget that Vanguard’s primary business purpose is to generate income for its unit holders. And it does that very well. Vanguard has increased its distribution over 41% since its IPO and consecutively over the last seven consecutive quarters.
Its current $2.40 annual dividend rate — 60 cents paid in July — is 4% higher than the dividend paid a year earlier. And that payout seems secure. The distributable cash flow coverage was 1.4 times for the 2011 distributions and the company is forecasting a coverage ratio of 1.25 times in 2012 at the $2.40 annual rate.
Vanguard also has a multi-year hedging program in place. Currently 80% of crude oil production through 2014 is hedged with a price floor of $90.89. For natural gas, 85% of projected production is protected through the first half of 2017 at $5.11 million metric British thermal units (MMBtu).
All this goes a long way to secure the company’s current 8.8% distribution yield.
Finally, Vanguard has just announced the company will be paying unit holders monthly. This change benefits income investors and allows the company to quickly pass along distributable cash flow increases. A cash distribution attributable to the July 2012 distribution of $0.20 per unit ($2.40 on an annual basis) will payable on Sept. 14 to unit holders of record on Sept. 4.
Put another way, you can expect at least a 20 cent per share per month distribution payment for holding the stock, beginning in September.
So buy Vanguard Natural Resources (VNR) at market today, and place your stop at a wide $22.75. The median price target for analysts that cover VNR is $32.63 a share. That’s 15.8% above current levels.
Because I anticipate a pullback in the markets, I am not recommending any options on this one just yet. But keep an eye out for possible option recommendation in the coming weeks.
Disclosure: This is a position I hold on behalf of some of my clients at my firm Global Guru Capital
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PIMCO Municipal Income Fund II (PML) dipped 1.22% last week. You were paid a .065% dividend on Aug. 9. Dipping below its 50-day MA, PML is a HOLD.
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Apollo Investment (AINV) jumped 3.23%. Earlier this year, analysts at Barclays (BCS) upgraded the shares from equal weight to overweight, and set a $9 price target. This is 20% higher than current levels. Yielding 10.5%, AINV is a BUY.
Omega Healthcare Investors Inc. (OHI) gained 0.55% over the past five trading days. Obamacare and aging demographics all support the long term case for this pick. You received a quarterly dividend of $0.42, on Aug. 15. OHI is a BUY.
PowerShares Preferred (PGX) was flat. You received a $.077 cent monthly dividend on Aug. 15. This monthly income payer remains a BUY.
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