With High Yields and No Taxes, Here's Your Best Play on Energy's Comeback

If you're looking to exploit the rally in oil and gas companies, this stock not only rises in tandem with energy prices but also throws off a high dividend yield.
By John Persinos ,

Is energy's long-awaited comeback finally happening? Whether the sector's surge on Tuesday is temporary or the start of a long-term turnaround, you can earn income and growth now with a great energy stock that also happens to be a high-yield dividend payer: Enbridge Energy Partners  (EEP) . The time to jump on this stock is now, during the nascent stages of any energy recovery.

The beleaguered energy sector rallied 2.5% on Tuesday, as the price of oil leaped 4%. The price of the U.S. benchmark, West Texas Intermediate, rose 3.8%, to close at $47.90 a barrel; the international benchmark, Brent North Sea Crude, added 3.6% to close at $50.54 a barrel.

Among the biggest gainers amid Tuesday's surge in the energy patch were exploration and production giants Exxon Mobil and Chevron, which gained 1.8% and 3.3%, respectively.

Drilling and exploration firms such as Pioneer Natural Resources and Anadarko Petroleum also rallied Tuesday, up 6.3% and 5.3%, respectively.

Problem is, these E&P and drilling companies are susceptible to energy price gyrations and would likely fall again if energy prices resumed their downward path. But by investing in a master limited partnership like Enbridge, you can earn a high dividend yield and even lower your tax burden. If energy prices continue to rise, EEP's price will appreciate. Indeed, Tuesday's rise in oil prices lifted EEP's stock by 3.78%.

However, if energy prices take longer to mount a sustained comeback, you can enjoy robust income while you're waiting. And right now, EEP's stock pays a fat dividend yield of 8.35%.

EEP

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MLPs are especially enticing for income investors because they confer tax savings and deferrals. MLPs were extremely popular until the collapse last year in oil prices. Now, in a typical example of "groupthink," investors are shunning the entire MLP sector. But that's myopic, because as we saw on Tuesday, energy prices won't stay low forever. Global economic growth may be anemic but it's still on track and a rising middle class in emerging markets still crave an energy-intensive lifestyle.

Enbridge is a "best-of-breed" MLP that has increased its high yield dividends every year since 2006, in good times or bad. MLPs such as Enbridge are involved in the business of linking energy-producing fields with refineries, distribution, and retail sales centers. MLPs do appear in non-energy industries, but for the most part they're focused on companies that are involved in the extraction, storage, and transportation of energy commodities such as oil, natural gas, and coal.

Just like real estate investment trusts (REITs), MLPs are pass-through entities that transfer profits and losses to individual unit holders. But because of depreciation allowances, the IRS considers 80% to 90% of the distribution you receive a return of capital. So you don't pay taxes immediately on that portion of the distribution you receive, making it tax-deferred. The remaining 10% to 20% is taxed as regular income. You're not taxed on the return of capital until you sell the units. What's more, those payments are used to reduce your cost based on the MLP.

Among its MLP peers, Enbridge Energy Partners has the brightest prospects. The company is pursuing about $1 billion worth of expansion projects scheduled to come onstream this year. And the company's extensive operations in western Canada and the North Dakota Bakken formation make it the biggest pipeline transporter of oil production from those two prolific regions, accounting for about 17% of total U.S. oil imports.

The MLP's natural gas business also is robust and growing, delivering about 2.2 billion cubic feet of natural gas daily in the U.S. mid-continent and Gulf Coast regions.

If you're looking for a play on a comeback in energy that also confers major tax advantages and pumps out a steady stream of sustainable income, Enbridge is the best bet you'll find.

And if you're frustrated with paltry yields in today's low interest rate environment, check out this free report of high yield opportunities, 11% Yields and No Taxes

John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.

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