Inflation is peaking, at least that’s what government bean counters tell us. But anyone who’s been to the grocery store, gas station, or paid their utility bills might say otherwise. Of course, the core inflation numbers which economists say exclude food and energy, which is pretty unsatisfying for anyone who eats, drives, or cools their home.
Energy prices, in particular, appear to be increasing. Some analysts predict that crude oil, which has nearly doubled this year to over $ 70 a barrel, will hit $ 100 in 2022. Natural gas, which is receiving less attention despite its key use to generate electricity and heating homes, recently hit a multi-year high of $ 5. per million cubic feet in the United States and three times in Europe.
Like the weather, we can complain about the rise in prices. But what can we do? One of the few things is to hope that our income at least keeps pace with inflation. Unfortunately, average hourly earnings rose 4.3% year-over-year through August, short of the 5.3% increase in the Consumer Price Index during that period. .
For investors, it is even worse. The 1.31% yield on 10-year T-bills is well below past inflation, while 10-year inflation-protected T-bills, or TIPS, offer a real yield of minus 0. 99% for the next decade.
A better offer for savers looking to maintain their purchasing power are inflation-linked savings bonds, or I-bonds, which pay a real return of 0% – still better than negative-yielding TIPS – more an adjustment based on the CPI, which stands at 3.54% for the six months to October. (See the Treasury website for more details, including limits on I bond purchases and holding period requirements.)
For those wondering if inflation will be as transient as the Federal Reserve and other policymakers claim, the best defense is to find investments that benefit from rising prices.
To this end, Barron has assembled a half-dozen closed-end funds, or CEFs, that invest in energy, primarily through Master Limited Partnerships, or MLPs. Each CEF earns 8%, after rounding, or more and trades at a discount to its underlying net asset value, or NAV.
|Trustee / Claymore Energy Infrast.||FMO||9.41%||-10.49%|
|Energy infrast by Kayne Anderson.||KYN||8.87||-11.15|
|First Trust Energy Inc. & Growth||SWAMP||8.85||-4.30|
|First Trust MLP & Energy Inc.||FEI||8.36||-10.36|
|Macquarie / First Trust Global Infrast./Utils. Div. & Inc.||MFD||8.24||-7.17|
|First Trust New MLP & Energy Opportunities||FPL||7.96||-9.60|
Data as of 09/17.
(Click here if the table does not load.)
The energy sector is a good place to seek income. The
Energy Select Sector SPDR Exchange Traded Fund
(ticker: XLE) offers a 30-day SEC return of 4.34% and is dominated by US majors, such as
Adams Fund for Natural Resources
(PEO), a closed-end fund, has a large overlap in its portfolio with XLE, including these top three names, but is trading at a nearly 13% discount from net asset value. Adams Natural Resources aims to distribute 6% to shareholders each year, most of which comes with a year-end payout.
The popular XLE ETF is based on the energy sector of the
which only takes into account companies domiciled in the United States. This arbitrary distinction excludes non-US oil majors, such as
Royal Dutch Shell
(RDS.B), which fellow fellow Andrew Bary recently wrote, had the most potential of any major oil company. Previously, he had also come up with a list of six high-yielding energy stocks.
The CEFs listed here offer even higher returns, enhanced by leverage, which means they use borrowed money. One of the risks is that if their cost of borrowing increases, it hurts their income; given the likelihood that the Federal Reserve will not raise its key rates before the end of 2022 or 2023, this risk is relatively contained.
But another danger is a sharp drop in the value of their MLP assets which could force CEFs to liquidate them to deal with what are in fact margin calls. This happened during the pandemic-induced crash of all markets in March 2020, a risk Barron notified at the end of 2019.
However, the degree of leverage used by MLP CEFs is lower than at the time. And the outlook for energy prices is positive.
Of course, they present other complexities. Many of their distributions qualify as return of capital for tax purposes. But unlike MLP direct holdings, which issue K-1 tax returns that some investors don’t like due to their added complexity, funds issue 1099s like other stocks.
Write to Randall W. Forsyth at [email protected]