The Perfect Income Trade For Rising Energy Prices
Last week, I talked about inflation again. It’s a topic I’ve mentioned many times over the past few months, and for good reason.
One of the biggest drivers of inflation is energy prices. The Consumer Price Index shows that energy prices are up an average of 30% in the past 12 months.
Source: Federal Reserve
Inflation may get even worse in the next few months. As winter sets in, consumers are dreading their monthly heating bills. Natural gas is used to heat almost half of the homes in the country and the price has almost doubled in price over the past year. Heating oil, which is used in many homes in the Northeast, is up more than 100% as well. Propane, a fuel used by many homes in the west, also doubled in the past year.
Based on projections from the U.S. Energy Information Administration, The New York Times reports…
If winter is somewhat colder than usual, energy bills could rise 15 percent for households heated by electricity, 50 percent for those depending on natural gas and 59 percent for those that mostly use heating oil. Propane users would be in for the biggest blow — a 94 percent increase, or potentially hundreds of dollars over the six-month heating season.
How We Can Profit…
This is, of course, just one aspect of the inflation problem — but it’s significant. This is also a reason that energy stocks are among the market leaders as the sector moves toward two-year highs in price.
Over at my premium Maximum Income service, I recently recommended a stock that can benefit from higher energy prices: Devon Energy (NYSE: DVN).
Devon Energy is a low-cost shale producer. The company is profitable with oil above $30 a barrel. The current price of oil is above $75, so there’s no question the company is hitting that threshold.
The company generates about 70% of its production from fields in Texas, with the rest form North Dakota, Wyoming, and Oklahoma. Production is evenly split between oil and natural gas.
The company’s free cash flow growth reflects its low cost basis and high market prices.
Source: Company Presentation
Strong cash flow allows the company to pay a high dividend. Devon Energy has adopted a variable dividend policy. The company pays a fixed quarterly dividend of $0.11 per share. In addition to that, investors also receive a variable dividend of up to 50% of excess free cash flow. That has resulted in a dividend yield of about 9% at recent prices.
With oil prices unlikely to fall, Devon’s high dividend is safe. Because the dividend varies with cash flow, the stock is underpriced. That makes DVN an attractive vehicle for income-minded investors. But thanks to the strategy we use over at Maximum Income, we can earn even more income while still potentially holding our shares for long-term upside.
Based on the details of our recent trade, we were able to earn an additional 2.7% on our capital. And because this trade will only last for about 29 days, if everything goes according to plan, we will be free to make another trade like this if we want.
Trading this way is the closest thing you can get to a “win-win” scenario when it comes to investing. And that’s why I think it’s so important for regular investors to learn how it works — especially if your primary focus is income.
Unfortunately, most investors have no clue how to do this… Even though it’s pretty straightforward and easy to learn. In order to change that, I’ve put together a special report that explains everything you need to know. Once you get started, you’ll see just how easy it is — and how you could be earning hundreds (or thousands) in extra income every single month, like clockwork. Go here to learn more now.