Lock in high yield with an MLP

[dan_s]

Would you be happy with a 12% yield on your investment over the next five months? Who wouldn't in this crazy market.

Here is how you can lock in a double digit yield with virtually no risk. What your doing is buying a stock and selling it immediately at a closing date in the future. Between now and the closing date, you get the dividends. It is that simple.

As an example we use EVEP: On Monday you can do a few trades to lock in 12%:
Example assumes 1,000 shares are acquired

$34,350 < Buy EV Energy Partners, LP at $34.30/per unit
- 9,450 < Immediately sell Dec 2010 $25 (strike price) Covered Calls
---------
$24,900 < This is your net cash outlay

$ 3,020 = EVEP's annual dividends

12.1% = Annual yield on your net cash outlay

If you do nothing the shares will be called at $25 mid-December. If you pay attention you can continue to roll forward the Covered Calls position a few days before the strike date. [NOTE: Your stock can be called before the strike date but that is no big deal. All you do is set it up again.]

EVEP is a high quality MLP with very consistent dividends. In fact, they have a very high percentage of their production hedged so there is little commodity price risk here. MLP's are partnerships so you will get a k-1 at year-end but that's no big deal. The good news is that a large portion of the distributions are tax free return of capital. I will take a higher after-tax yield for a small hassle at tax time anyday.

There are several high quality large-cap MLP's that trade options. KMP and LINE are two others to take a look at for this strategy. KMP is a midstream MLP which means lower risk but you do give up 3% to 4% on the yield. You can also do this with the large-cap Canadian Royalty Trusts like BTE, ERF and PWE.

Dan