I’m seeing a move into what I call the “world’s reserve currency” — a barrel of oil. All oil transactions are done in U.S. dollars, so with the dollar’s long-term chart continuing to lose value because of quantitative easing, I’m a fan of continuing to own some commodities, primarily in the master limited partnership (MLP) area, which offers tremendous returns. It’s been the best-performing sector in the stock market in the past 10 years.
I’ve long been a proponent of acquiring domestic onshore oil and gas exploration and production MLPs because the Department of Energy is reluctant to pursue much offshore deepwater drilling after the BP (NYSE:BP) oil spill. Domestic oil fields are in unpopulated areas, which avoids environmental impact concerns, and they create good jobs in the $80,000-$120,000 salary range.
Another upside is that domestic energy also gets us out of the Middle East and helps in the effort to make American energy independence a reality. The alternatives are non-fossil fuel energy sources, which cost taxpayers billions of dollars with little return as of yet.
This is where we can buy assets unaffected by the current tax legislation on the table. MLPs offer tax-advantaged income, and they give people a chance to own really good domestic oil and gas assets that offer a hedge against high fuel costs. We can earn some nice dividends as well — and at yields higher than energy giants like Chevron (NYSE:CVX), which doles out a measly 3%.
Two of my favorites are SandRidge Mississippian Trust (NYSE:SDT) and SandRidge Permian Trust (NYSE:PER), which are both royalty income trust MLPs owned by parent company Sandridge Energy (NYSE:SD). SD has 32.7% ownership of SDT and 34% ownership of PER, which tells me that its interests are aligned with shareholders.
The main difference between these two 11%-yielders comes down to geography. SDT owns royalty interests in oil and natural gas wells in northern Oklahoma, producing from the Mississippian formation, while PER operates in the Central Basin Platform of the Permian Basin in Andrews County, Texas.
As domestic royalty trusts, SDT and PER entitle the shareholders to the net profits of their oil and natural gas wells until they run dry. I recommend getting out of these trades long before that happens, but not before you have a chance to see your money grow.
Both SDT and PER are quarterly payers. PER generally pays out just under 60 cents per share, and SDT pays out around 70 cents per share. They’re set to go ex-div at the beginning of November, so make sure you get in before then.
Bryan Perry is editor of Cash Machine, a newsletter focused on dividends and income investing.