Articles

By: Bill Spencer — September 6, 2019

Small-Cap Saturday -- How to Earn Triple the Income of Bonds

Good morning friends.

Bill_TheKeys

How are you?  If you found yourself in at the path of Hurricane Dorian this past week, I hope you and your family stayed safe and sound and dry.

Now on to happier topics...

Back on June 29th, ("Why Small-Caps Are Great for Income") we saw that if you were looking to collect tasty dividends, you could find them in small-cap stocks just as easily as in large- and mega-caps.

Today you're going to discover another small-cap vehicle that lets you enjoy regular handsome distributions AND double-digit capital appreciation.

You'll also meet a company (actually a limited partnership) operating in the surging Utility Gas sector.  This company has been putting out a reliable stream of cash -- one that currently yields 6.6% annually.

And as you're about to see, the yield on that extra "paycheck" could grow to more than 8% in the coming months.

In a world where 10-Year U.S. Treasury bonds yield under 2% -- and owning the S&P yields around 1.82% -- that 6.6% alone makes this an investment worth looking at.

But on top of yield, you could also see shares/units of this partnership appreciate by 25% or more.

This "hybrid" investment is called...

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A Master Limited Partnership (MLP)

A master limited partnership, or MLP, trades on an exchange like a stock or ETF.  But instead of shares of stock, with an MLP you buy "units" in the partnership.

MLPs don't pay corporate taxes.  So they have more cash available to distribute to investors.  In exchange for that tax benefit, MLPs must generate 90% or more of their income from "qualifying activities" -- things like energy exploration or real estate development.

You'll find the bulk of MLPs in steady, slow-growing industries, making them a lower-risk investment than stocks.

And unlike stocks, MLPs don't retain earnings for growth.  They pay them to investors.  This means that cash payouts from MLPs remain steady, reliable and large.

Over the past decade MLPs have yielded more than 7% -- almost twice the yield of Real Estate Investment Trusts (REITs), and almost three times what you'd earn from bonds, according Alerian, an energy infrastructure and MLP research firm.

(Click any image to enlarge)

MLPYieldsVersusOthersAnnotated

(Important Side Note: As an investment, MLPs are taxed differently than stocks.  I can't provide anything that could be considered personalized investing advice.  Consult your tax professional before investing in MLPs.)

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Today's Small-Cap Standout

TC PipeLines, LP (NYSE:TCP), was formed by TransCanada PipeLines Limited, a wholly owned subsidiary of TC Energy Corporation (TC Energy).

The company owns, manages, or has an interest in eight North American pipelines capable of moving 10.8 billion cubic feet of natural gas every single day.

On July 23rd TCP announced a cash payout of $0.65 per unit (a 6.6% yield).  That payout marked the 81st consecutive quarter of distributions.

On March 15, 2018 the company found itself on the wrong side of a ruling by the Federal Energy Regulatory Commission (FERC).  The ruling (concerning how certain taxes could or could not be used to calculate revenue) was not aimed at TCP, but rather at the entire oil and gas pipeline industry.

TCP's unit price fell almost 53% in 11 weeks, from $44.43 to $21.00.  The quarterly distribution was cut from $1.00 to the current $0.65.

In July of 2018, FERC more or less rescinded key portions of their ruling.  Since then the price has moved 91% off that 2018 low, and now trades around $39.

This partnership is strong versus its sector peers (Peer RS) and against the market (Market RS) -- something that should bring a wide smile to every investor's face.

TCP_Key_Torn

If TCP breaks above that pre-ruling level (and I think it will), the unit price could easily gain an additional 15% as it sails beyond its 2018 high of $49.08.

TCP_FERC_Annoyate

Better still, TCP could then restore its quarterly distribution to $1.00, bringing the yield to just over 8%.

We have two great reasons to be optimistic about this MLP -- a surging sector and strong institutional sponsorship.  Let's take these one at a time...

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The Utility Gas Sector Is Getting Hotter

Right now the Utility Gas sector has a very high ranking, being the #2 ranked sector out of 45.

Its sector's BPI chart, (which we view on a “point and figure chart”, which is the one with X's and O's) is on a "buy signal", meaning the sector is strong over the intermediate-to-long term.

Allow me to translate...

It’s telling us that with every wave higher in the price level of Gas Utilities sector, we have a larger and larger number of Gas Utilities stocks participating in the upswings.  This is bullish for the long-term horizon.

What about the short-term?

The chart is in a column of O's.

UTGA_BPI_Annotated

In case you’re not familiar with the way a sector BPI works, the columns tell us what’s happening in the shorter-term.  When more and more stocks in the group are bullish, the most recent column is an X-column.  When the recent trend is more and more stocks in the group looking bearish, we will see an O-column. 

So what we are seeing for the sector is long-term demand, but short-term we have supply in control.

To look at this a little more closely, and to check out an even shorter-term view, we look at the sector's %30-Week chart.  This technical indicator is also viewed on a “point and figure” chart.

UTGA_%30-WK_Annotated

The %30-Week shows the percentage of stocks in the Utility Gas sector currently trading above their 30-week moving average.  Not only did the chart recently flip to X's, it also went on a buy signal (when the new X column broke above the previous one).

This is key because, as an indicator, the %30-Week tends to lead the BPI.

Basically, this tells me that we are likely to see the longer-term BPI moving to X's very soon, a further sign of strength.

The final key thing I look at, when technically analyzing a sector, is the “sector relative strength” (sector RS).  Sector RS tells us if the group is outperforming the stock market - a dynamic that tends to stay intact for a long time, once established.

The Utility Gas sector's RS is in fact strong in both the short-term and the long-term.

Finally...

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Institutions Are Loading Up on TCP

In the third quarter of 2019, major funds increased their purchases of TC PipeLines by a factor of 41 compared to the previous quarter.

TCP_Inst_Ownership

In fact, so far this quarter, big institutions have purchased almost twice the amount of TCP than in the previous four quarters combined.

They're obviously expecting a huge move in this LP, one that would probably dwarf the 25% we talked about above.

And what if the funds are wrong?  (It has been known to happen...)

Even then, you'll still benefit.

Remember, TCP has paid out cash every quarter since August of 1999.  The declared distribution tends to stay in place for many quarters.

The lower the price at which you can accumulate units, the higher your cash payout yield.

And while we haven't gone into detail in today's conversation, MLPs do in fact give you tax advantages in addition to capital gains and mouth-watering yields.

Win-win... and win again!

Thank you for reading,

Keep it Small

Big Bill

Bill_TheKeys

 

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