Wednesday, June 8, 2011
The action in natural gas in the past year hasn't been pretty, but it's been good enough to produce big income payments for contrarian investors.
In the past few years, I've noted how the natural gas sector is one of best places in the market to find safe income payments...
Natural gas is chiefly used in heating and cooling, electricity generation, and as a raw material for various industrial products. Due to amazing advances in drilling technology, the U.S. now has a glut of the stuff... and prices have crashed since 2007:
Most investors see a drop like this and run away. But it actually created a great income opportunity with natural gas royalty trusts, like S&A Resource Report holding San Juan Basin Trust (SJT).
I recommended San Juan at around $22 per share just over a year ago. My thesis was that natural gas was "blown out" and cheap... yet natural gas trusts were yielding in the neighborhood of 7%-10% in distribution payments.
I love it when we can pick up big income payments in a beaten-down, cheap commodity. You take on much less risk than you do collecting income from a commodity that has soared in value.
And although gas prices have been super volatile, the fuel has held a price floor in the $3.50-$4.50 area... which has allowed San Juan to crank out income. Here's a chart of how our monthly paychecks have flowed:
As you can see, there were some wild gyrations in the distribution payments in 2009. Since then, its distributions have evened out. Since we bought, back in April 2010, we've received 14 checks for a total of $1.75 per share... an 8% yield on our purchase price.
If you took advantage of this opportunity, I recommend you keep holding and collecting these contrarian paychecks. If you haven't bought yet, I'd use any 10%-15% short-term decline in the share price to pick up shares.
"We've discussed the merits of natural gas many times," Brian Hunt writes. "It's cheap. It's plentiful. It's politically correct." And as Matt points out today, SJT can offer a fat yield at the right price. Read more here: Another Road That Leads to The Future Of Energy.
If you're long-term bullish on natural gas, Brian Hunt offers an investment idea to steer way clear of. "The spectacularly bad performance" in this "popular natural gas investment continues..." Find out what Brian calls The World's Worst ETF.