The market volatility we contrarians have been waiting for is finally starting to show up—and we’re going to play it with a cheap energy fund paying a sweet 9.1% dividend.
These days, most investors think energy is played out. But the truth is, we’ve seen a “slow-mo” selloff, with crude tumbling about 10% from back in early April.
And we’ve got Uncle Sam on our side here, too.
This is an election year after all, and last week we got word the Biden Administration will empty the Northeast Gasoline Supply Reserve, set up to provide an emergency supply after Superstorm Sandy in 2014.
That’ll drop a million barrels of gas into the market—just in time for summer driving season. (To be fair, the sale is mandated by law—but the government does control the timing.)
That fits with the administration’s drawdown of the Strategic Petroleum Reserve, which it’s been using to artificially pin down oil prices for a couple years now.
Unlike the Northeast Gas Reserve, the SPR will have to be refilled (you can see that starting to happen on the right of the chart above), but you and I both know the administration won’t get serious about that—and risk higher gas prices—before November.
The bigger picture here, then, is that after the election, Uncle Sam will likely be a buyer. And we know what that means: higher oil prices!
That makes now, with the SPR ever-so-slightly starting to nudge higher, a smart time to buy. We can give ourselves a “double discount” on tapped-out oil when we buy through a closed-end fund (CEF) like the Kayne Anderson Energy Infrastructure Fund (KYN).
Right now, KYN sports a 15% discount to net asset value (NAV, or the value of its underlying portfolio). That’s another way of saying we can get its oil and gas shippers and storers, like Williams Companies (WMB), Energy Transfer LP (ET) and Enterprise Products Partners (EPD), for less than what we’d pay if we bought them “direct” on the market.
These discounts only exist with CEFs, and they give us an idea of our upside: In mid-2021, for example, before the Fed’s rate hikes, KYN’s discount shrank as low as 7%, so we can look forward to some discount-driven upside as rates normalize.
And that’s before any gains in KYN’s portfolio holdings themselves.
The firms KYN owns are “toll bridges” that will benefit as Uncle Sam restocks and consumers, with more spending power as rates fall, travel more.
A 9.2% Payout That Grows
The other nice thing about KYN is that we get the vast majority of our return in dividends, thanks to the fund’s 9.2% payout. And that high dividend has actually grown since it bottomed when the world closed down in early 2020!
Finally, many of KYN’s holdings are master limited partnerships (MLPs), which send out a complicated K-1 package at tax time. But if you buy through KYN, you don’t have to worry about that: You get a simple Form 1099 instead.
So you’re not only getting a discount and a high (and growing) payout here—you’ll also save yourself (or whoever does your taxes) a major headache.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
Disclosure: none
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