Buying Vanguard National Resources (VNR)

Last week, I bought a position in Vanguard Natural Resources LLC (VNR). VNR is a master-limited partnership. MLPs in the United States are involved in transporting and storing a limited set of commodities, particular petroleum and other natural resources like natural gas. Basically, MLPs build and run pipelines for critical energy products used across the country.

MLPs are required to pay out a high rate of its cash flows as dividends in order to avoid paying corporate income taxes at the federal and state level. There are some other benefits involving depreciation that I won’t go into here. They aren’t effective when bought inside tax deferred plans like Roth IRAs, which is why I bought it in my tax exposed account. Just be sure to check if your CPA knows how to properly handle this when filing your tax returns.

If you haven’t gleaned this yet, MLPs have a higher payout than typical stocks. Looking at Yahoo, VNR’s current dividend yield is 8.40% ($2.40/share per year). It has an attractive P/E ratio of 7.50. Combined with a purchase price of $27.49, it makes a nice and affordable equity. Add to it that most if not all dividend payouts will be tax free (until you finally sell the stock, which is hopefully never), and you got yourself a sweet investment in my book to eventually draw retirement income from years from now.

VNR has recently announced their plans to shift from quarterly dividend payouts to monthly payouts in a few months. There aren’t many stocks that pay out monthly dividends. Imagine the convenience of building up a nice position to draw dividends upon in retirement. For the record, I decided on picking VNR before this was announced, but was pleased to hear such an announcement.

The other criteria I employed before picking VNR was the fact that it has been increasing it’s dividend payouts for several years. It is nowhere near being a dividend aristocrat or dividend king yet. In fact, it has only engaged in increasing its dividends for five years. For some, this may be a critical factor with five years being too short. In this case, I decided to take a chance. If they shift their dividend payout strategy in the future, I can sell my position and shift it to another MLP. There are many to choose from.

By all means, feel free to read my analysis and use it to create your own investment criteria, but don’t just buy VNR because I did.

Disclosure: Long VNR

3 thoughts on “Buying Vanguard National Resources (VNR)”

  1. Hi Greg,

    Do you have a due diligence analysis (Long thesis) on VNR in a document somewhere that I could see? I’m interested in exactly what about it makes you confident enough to put a large % of your portfolio in it. I am still pretty new to this MLP, have not done much research on it yet. In fact I have never done due diligence on an MLP. I would love to see specifically what you were looking for and what you found in the nitty gritty detail if you have it available! Thanks

    1. First of all, I don’t want to suggest you buy any particular stock. You would be the subject of confirmation bias, because I’m only going to talk about what I’ve invested in. There are many other blue chip stocks you could invest in and probably do just as well.

      I don’t have a single document. Instead, it was a process I executed. After reading DGI for the past year, reading every post at Dr. Dave’s website, and some other material, I was definitely interested in adding some MLP stock to my portfolio. MLPs have a tax advantaged structure that I like, and they tend to have high payouts due to their avoidance of double taxation. They suit my situation.[2]

      I had read http://www.dividendgrowthinvestor.com/2012/07/master-limited-partnerships-continue.html, which offered a listing of MLP stocks. I inspected each of them, and honed in on the one’s with higher dividend yields. Eventually, I picked VNR, but you might do well with any of the ones on that list.

      Due diligence is a tricky beast. I check for things like dividend history. Have they been paying consistent, growing dividends? Have they had cuts? MLPs work differently than typical stocks, so you have to watch out when evaluating debt. They constantly sell new shares to raise funds and buy new assets that later get turned into cash flow to you. Under conventional GAAP accounting rules, this can appear less than optimal. People sometimes look at EBITDA, but that can be a black art in and of itself. Basically, since I got started (August 2012), they have only done good, so I am happy with their overall performance. But I’m pretty sure that if I had invested in any of the top market MLPs, I would be singing the same tune. They all institute hedging to ensure solid returns to their investors. The ticket is to not panic when prices dip and sell out. Instead, keep taking your distributions, and properly track your net worth on a monthly basis, to see how things are growing.

      To paint a more complete picture, I only have about 6% of my net worth invested in VNR[1]. To me, this isn’t a huge chunk. To people like Dave Ramsey, it would appear to be an insane amount to allocate to a single stock. But I prefer to keep my investments concentrated. Most of my investment is in rental property, and I have received a good amount of income from it.

      VNR is a gamble in the sense that they are only five years old. But they have been growing their distributions since day one.

      The wisest money says to invest in dividend kings and dividend achievers. If you google for that, you will find a spreadsheet you can download that is updated annually, listing the 200 some odd dividend kings and achievers, and their 5 and 10 year performances. These blue chips are solid stocks, and I used it as a key part of making my choice on investing in GD and BP.

      I bought BRK.B, but just a tiny bit, because who can argue with Warren Buffet? Dr. Dave probably has most of his money invested in BRK.B, and he says it has served him well. I prefer more cash yield, so I doubt I will invest what he has.

      I bought AAPL because I love their products, I love their balance sheet (tons of cash waiting to be invested), and I love their long history of solid growth.

      I monitor probably ten other stocks at the same time. I just don’t write about them.

      [1] – http://www.turnquistwealthbuilders.com/2013/10/real-estate-vs-stocks-vs-eiuls.html
      [2] – http://www.turnquistwealthbuilders.com/2013/06/tax-deferred-mechanics-of-mlps.html

    2. Thanks for the reply. Yes I didn’t realize it was just 6% of your portfolio. (A huge chunk for “index-istas”, but not for Buffett accolades.)

      I have liked EPD and MMP in the past for MLP picks but will research VNR deeper when/if I decide to go that route.

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