On an unseasonably warm day this past November, two men you
might have heard of -- Bill Gates and Warren Buffett -- visited the
town of Gillette.
This tiny city in northeastern Wyoming is home to less than 30,000
people. Yet, it was important enough to host the two richest men in
America for a day.
The short trip has received little coverage in the months since,
but it has been leaked what Gates and Buffett were doing in the
area. These two men, worth a combined $100 billion, flew all the
way to this tiny town in Wyoming to tour a local coal mine.
The trip to
Arch Coal's (NYSE:
Black Thunder Mine could mean an investment in coal is in the cards
for Gates and Buffett, but there's noguarantee . The exciting part
is that when you look deeper into the investment potential of coal,
the story is unrivaled -- whether the country's richest men invest
in it or not.
During the past 10 years, coal consumption has grown more quickly
than any other energy source. According to Greg Boyce, Chairman and
Peabody Coal (NYSE:
, coal use grew twice as quickly as hydroelectric and natural gas,
and at four times the rate of oil use during the past decade.
Most Americans are surprised to discover that coal already produces
nearly half of the country's electricity -- a whopping 45.3%,
according to the latest U.S. government statistics. The main growth
driver for coal demand, however, lies outside the United States.
Nearly 80% of China's electricity is powered by coal, helping make
it the world's largest consumer. The country uses more coal than
the United States, Europe and Japan combined. And in India, where
53% of electricity is coal-generated, more imports are needed as
demand for electricity spreads. India imported 73 million tons of
coal in 2010, which was 22% higher than in 2009.
The good news for stateside investors is that the United States is
known as the Saudi Arabia of coal. The country has by far the
world's largest reserves. An estimated 238 billion tons of coal
reserves represent around 29% of known reserves, far outstripping
why should income investors care about the growth in coal demand?
After all, the yields offered by this industry are notoriously
Sure, coal has a compelling growth story, but most major U.S. coal
mining companies are simply not high-yield plays. The big four coal
miners -- Peabody,
and Arch Coal eachyield around 1%.
However, there is a way income investors can take advantage of this
hot sector. The solution is a little-known energy play -- coal
master limited partnerships (
). These investments typically throw off 6-7% a year in quarterly
Coal MLPs trade on the major U.S. exchanges just like common
stocks. The yields are high because, under thepartnership
agreements that set them up, coal MLPs are required to pay out most
of theircash flow to investors.
But these partnerships don't mine a single ounce of coal. Instead,
their main activity is collecting royalties from theirshares of
coal-producing properties. The benefit of this arrangement is that
the coal MLP doesn't incur mining costs or related risks. Their
operating costs consist mainly of administrative and corporate
expenses. The rest is passed on to investors -- as prescribed by
Action to Take -->
The investment universe of coal MLPs is tiny: only seven
partnerships operate in this space. However, four of these coal
MLPs offer yields of 6% or better. One of them,
Penn Virginia Resource Partners (NYSE:
, carries a 6.7%yield -- the highest in the group at the moment.
Virtually all of the coal MLPs delivered gains at least twice the
S&P 500 last year.
I say that's a pretty good showing, even without a dime from Gates
I'm a big fan of these coal MLPs. In fact, I just added one to my
portfolios -- a 6.3% yielder that's grown payments more than 60%
since 2005. This sort of find is a perfect example of my strategy
of going off the beaten path to find dependable income. To learn
more about my techniques,
read this memo
-- Carla Pasternak
Disclosure: Neither Carla Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.
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