A Huge Yielding Play on the “Fracking” Revolution

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

I am sending you this week’s Dividend Pro early, in advance of Thursday’s Thanksgiving holiday. I hope you and your family enjoy a happy holiday season.

Markets recovered somewhat in the past few days, and you saw that in your Dividend Pro portfolio. You were, however, stopped out of Vanguard Natural Resources (VNR) for a loss.

This week Dividend Pro recommendation is way to profit from the United States’ emerging energy independence, which I discussed in detail in today’s The Global Guru.

Northern Tier Energy Trust LP (NTI) is an independent downstream energy partnership with refining, retail, and pipeline operations that serve the U.S. Midwest.

Thanks to the “fracking” shale oil revolution in the Bakken region of North Dakota, Midwestern oil refiners like NTU are minting money.

On Nov. 12, the company reported operating income of $199.4 million for the third quarter of 2012, an increase of $33.7 million, compared to the third quarter of 2011. This increase in operating income is primarily due to improved results in the refining segment. Put another way, NTU enjoyed higher margins per barrel, thanks to cheap local Bakken oil. That also explains why the stock has surged 63% just since its initial public offering (IPO) in July.

But the real headline attraction of NTI as an investment is its gargantuan yield.

The company also announced its first quarterly pro-rated distribution of $1.48 per share. The stock went ex-dividend on Nov. 19. This payout is even bigger than it first looks.

Here’s why. The cash available for distribution spans the period from the company’s IPO in late July through Sept. 30. That’s only two months of cash for dividend payments. My back of the envelope calculation shows that the payout comes to a monthly distribution of $.74, or $8.88 on an annual basis. Divide that into a $21.00 stock price, and you get an annualized dividend yield of over 42%!

I do not expect the yield to stay this high by the time the next dividend payout date rolls around. But if you are looking purely for high-yield opportunities as the broader market continues to decline, NTI is a hard stock to ignore. And NTU also benefits from being in a sector with a strong uptrend.

Deutsche Bank has a $25 price target on the stock — about 17.4% above Monday’s closing price. I expect it to  recover to that level in the next few weeks.

So buy Northern Tier Energy Trust LP (NTI) at market today, and place your stop at $16.00. If you want to play the options, I recommend the March 2013 $22.50 calls (NTI130316C00022500).

Portfolio Update

Global X SuperDividend ETF (SDIV) rose 2.27% last week. Trading below its 50-day MA, SDIV is a HOLD.

Two Harbors Investment Corp. (TWO) leapt 9.55% this past week as U.S. mortgage REITs bounced strongly. TWO remains a HOLD.

PIMCO Municipal Income Fund II (PML) rose 2.7%. PML paid out a monthly 6.5-cent payment on Nov. 8. PML is now back to a BUY.

Apollo Investment (AINV) jumped 9.74%. Yielding 10.2%, and now trading above its 50-day MA, AINV is back to a BUY.

Omega Healthcare Investors Inc. (OHI) ended the week 1.98% higher. With the stock trading below its 50-day MA, OHI remains a HOLD.

PowerShares Preferred (PGX) rose 0.41%. It paid out a monthly dividend of 7.9 cent on Nov. 15. Yielding more than 6.4%, this monthly income payer is a HOLD.

Fifth Street Finance Corp. (FSC) rose 6.5%. FSC went ex-dividend on Nov. 13 and will pay a dividend of $0.0958 on Nov. 30, after announcing earnings on Nov. 28. FSC remains a HOLD.

CVR Partners, LP (UAN) recovered 6.0% this past week. Still trading below its 50-day MA, UAN is a HOLD.

Rentech Nitrogen Partners, L.P. (RNF) rose 1.47%. With the highest yield in the sector, RNF remains a BUY.

Annaly Capital Management (NLY) rose 4.76%, as the U.S. mortgage REIT sector staged a strong recovery. NLY remains a HOLD.

Peritus High Yield ETF (HYLD) rose 0.28%. Still below its 50-day MA, HYLD is a HOLD.

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