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.
Portfolio Update
Global X SuperDividend ETF (SDIV) rose 1.01%, as global markets continued their recovery. Boasting a yield of 7.38%, SDIV remains a BUY.
Two Harbors Investment Corp. (TWO) gained 0.98% last week Two Harbors is moving ahead with its home-buying strategy and purchased $48 million worth of homes in July. Two Harbors plans to buy $120 million worth of homes in 2012.TWO is a BUY.
American Capital Agency Corp. (AGNC) was flat, falling 0.43%. The Fed decided to keep the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. This is bullish for AGNC. Dipping below its 50-day moving average (MA), AGNC is a HOLD.
Prospect Capital Corporation (PSEC) jumped 3.47% after reporting reported higher profit for the fourth quarter. Net income rose to $64.2 million vs. $30.2 million in the same quarter a year earlier — a more than twofold rise from the year-earlier quarter. Revenue rose 82.1% to $102.7 million from the year-earlier quarter. PSEC’s next monthly dividend payment is Aug. 24 for $0.101575. PSEC is a BUY.
iShares FTSE NAREIT Mortgage REIT (REM) was flat over the week. Last week, REM attracted $25.7 million dollar inflow — that’s a 3.9% increase week over week in outstanding units. REM’s current yield is 11.93% and remains a BUY.
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.
UBS E-TRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (BDCL) rose 0.92%. The top performing ETF of 2012 with a gain of just over 40%, it also boasts a yield of 13.93%.That’s a tough act to follow. Trading above its 50-day MA, BDCL remains a BUY.
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.
Fifth Street Finance Corp. (FSC) dropped 0.29%. You received a $.096 cent dividend on Aug.13. The Federal Reserves commitment to Zero Interest Rates should boost continue to this position. FSC remains a BUY.
PowerShares Emerging Mkts Sovereign Debt (PCY) recovered 0.37%. The ETF paid out a $.119 monthly dividend on Aug. 15. This play on foreign government debt yields over 5% and remains a BUY.