All energy investments and oil stocks are liable to give active investors a wild ride in these uncertain times. But some offer more potential ways to profit than others when it comes to energy investments. Take so-called oil and gas unit investment trusts like the BP Prudhoe Bay Royalty Trust (NYSE: BPT). These investments are a unique sub-group of oil stocks with big opportunity, particularly in dividend payouts.
A lot of UITs in the energy sector originate in Canada, although a few are in Texas and elsewhere. They’re similar to real estate investment trusts or REITS in that they’re structured somewhat like partnerships. Typically UITs invest in productive assets. That is, wells already pumping out oil and gas from proven reserves.
Like REITS, a UIT also pass nearly all of their profits directly to investors in the form of dividends. BP Prudhoe Bay Royalty Trust (NYSE: BPT), one such trust that’s been talked up lately, pays a projected 8.5% dividend – not too shabby in a world of 1.3 percent CD yields and an average dividend yield in the S&P 500 of just under 1.8% as of this writing.
But dividends are only way BPT and similar issues such as Pengrowth Energy Trust (NYSE: PGH), Baytex Energy Trust (NYSE: BTE), and Hugoton Energy Trust (NYSE: HGT) could serve investors well, going forward. If you believe continued tensions in the Middle East and elsewhere will move energy prices higher, then you might see energy UITs rising in price. Logically speaking, the number of investors piling on should grow faster than the total number of assets held within the sector.
You could hold on to BPT if you’re bullish on the company and the sector and bask in the dividends, or you could potentially boost profits by selling covered calls on your shares. Covered calls are an options trading strategy that novice investors may want to steer clear of, since they can be complicated. Basically, by selling a call, you give someone else the right to buy your shares at a designated price, referred to as the strike price. The risk is that if your calls are exercised (or bought by someone else when the strike price is reached), you might lose out on a forthcoming dividend. But if you’re careful, it’s possible to avoid this.
One more options strategy possible with the BP Prudhoe Bay Royalty Trust and other UITs would be to protect any forthcoming dividends while also safeguarding your principal. The way to do that is with a collar options trade. A collar is another sophisticated investment that involves selling a call and using the proceeds to buy a put option. Your downside risk is limited here, but again it is a sophisticated strategy maybe not for novices.
But even the most simple investing strategy can find power in energy UITs because of the big dividends. Even if shares flatline, an 8% dividend is an 8% return on your investment. That’s not too shabby in these volatile times.
As of this writing, Mark Ingebretsen did now own a position in any of the stocks named here.