Back in the game with VNR…with a twist!

newlogo7.9.10For those of you that have followed me for some time, you might remember that I held a big position in Vanguard Natural Resources (VNR)…and sold it a year ago. To recap, it went up about 10% from my purchase price. I pocketed that small profit and used all the cash to buy a discounted note, locking in a great yield.

So what’s happened since? That note has continued to yield solid cash. But I had another handful of cash that was going nowhere fast: my Roth IRA.

What to do when you can’t invest anymore

I opened a Roth IRA a few years ago. Since then, I can’t contribute anymore, because I am making too much money! That fund was initially loaded up on mutual funds. As you can guess, I sold those positions.

Wanting to put the cash into more discounted notes, I called John Park at PGI Self Directed. His expertise is setting up self directed IRAs and also wrapping them inside LLCs. There is a lot involved with doing this correctly. He even helped me educate a bank associate when I opened a checking account. (First time she had ever dealt with an LLC that was NOT some local business.)

With all this completed, my Roth IRA changed homes, and I essentially have its cash in hand to do with as I please (within IRA limits).

What if you can’t afford a note?

For six months, I kept looking for a note I could afford. Notes tend to start at around $30,000. Anything below that is hard to find. There was one that was within $800 of my cash position, and the note sellers refused my offer. My cash was going nowhere.

John called me up and mentioned he had access to a better account for my money. We discussed it in detail, and I transferred from a pure checking account to TD Ameritrade, where I could buy anything: stocks, bonds, and discounted notes. I figured I could pick some dividend paying stocks, grow the cash value, and when it reached critical mass, sell it to buy some notes.

Know your target investment

If you have been the slightest bit curious, you might have peeked at VNR’s performance over the past year. It’s been TERRIBLE! The distribution rate was cut in half back in February, and again just a few weeks ago, all the way from $0.21/unit to the current $0.03/unit. That’s an 85% drop.

It’s price tumbled from the low $30s (when I last sold) down to $2.75/unit at the time of this writing. That is almost 90% drop in price. Why?

The whole energy sector is down. Oil, natural gas, the works. So why invest AGAIN?

Because the time is ripe for a recovery. The general market has been panicking and getting out of VNR. As Warren Buffett has said, “You pay a very high price in the stock market for a cheery consensus.” VNR has strong acquisitions that will yield more natural gas and oil, and I feel I’m getting it at a discount.

But you should never invest in pure appreciation. Too many have lost too much on that premise. I’m not. If you look closely at the numbers above, you may notice that the price drop is greater than the yield drop. That means dollar for dollar, I’m buying more yield than I had before.

1% distribution per month is pretty good, and if the commodities tick up at all, I see great upside potential (which is the reason I called my broker to DRIP my VNR distributions).

Also, when I previously owned VNR, it was aimed at paying down a HELOC. That has made me very happy to have sold the prior position before such a loss hit (a very fortuitous situation!) My Roth IRA has no obligations except to grow itself. So the risk to the rest of my portfolio is minimal and the opportunity is grand.

Another word of wisdom: I have been reading detailed reports on VNR for more than two years. You should understand risk, cash flow, debt obligations, and other factors when you invest in anything. VNR has reduced its distribution with intentions to pay down debt. Many MLPs use debt to finance new deals and new positions. VNR is making a smart move by cutting back the cash spigot and strengthening their balance sheet. Hopefully, things will start to grow again as their new acquisitions begin to yield cash.

Stay tuned and let’s see if VNR takes off!

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