How I Found 6.7% Yields From the Two Richest Men in America

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.


#-ad_banner-#The trip to Arch Coal’s (NYSE: ACI) Black Thunder Mine could mean an investment in coal is in the cards for Gates and Buffett, but there’s no guarantee. 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 CEO of Peabody Coal (NYSE: BTU), 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 Russia’s 19%.

But why should income investors care about the growth in coal demand? After all, the yields offered by this industry are notoriously small.

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, Massey (NYSE: MEE), CONSOL (NYSE: CNX) and Arch Coal each yield 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 (MLPs). These investments typically throw off 6-7% a year in quarterly cash payments.

Coal MLPs trade on the major U.S. exchanges just like common stocks. The yields are high because, under the partnership agreements that set them up, coal MLPs are required to pay out most of their cash flow to investors.

But these partnerships don’t mine a single ounce of coal. Instead, their main activity is collecting royalties from their shares 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 law.

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: PVR), 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 or Buffett.

[Note: I’m a big fan of these coal MLPs. In fact, I just added one to my High-Yield Investing 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.]