So Long Pensions, Hello Energy Income


Someday soon, a history student will read a chapter titled: “The Pensions Era” and be completely confused about how there was ever a time when employers completely took care of their employees through their retirements.

We all know that only government employees and some teachers still receive pensions. But not that long ago, just about everyone else did as well.

Today, there are less than 45,000 defined benefit plans in the US. That’s half of how many there were in 1992 and less than one-third of 1989’s total just three years prior.

Of course, these defined benefit plans were replaced with alternatives for many. In the ongoing experiment that is the 401(k) and the IRA, workers can now build their own nest eggs in a tax-friendly way:

Now, the problem is how? With the old system, pension funds were run by skilled financial experts, making savvy decisions to provide enough growth and income for distributions to those in the collecting phase of their life.

Today, we have to do that ourselves. But something else has been on the rise, or we should say on the decline, during this same period… dividends:

This chart shows the dividend yield of the average S&P 500 stock dating back more than 100 years. Clearly, the last three decades have not been kind to those looking for income in their old age. And believe me, income in retirement is the essential piece of the puzzle of living a comfortable post-work life.

It doesn’t take long to see the difference between owning something the pays you distributions and one that you need to slowly sell in order to see an equal amount of disposable cash.

So, as many of us look to the future – or indeed are there now – we need to start building investments that pay out income we can live on. Yes, it’s gotten harder with fewer and fewer boards of directors deciding on the benefits of dividends rather than stock buybacks or golden parachutes for themselves. But it is possible. You just need to know where to look.

There’s one area that has long been a great place to find income-producing investments: energy.

Now, we all know the world is slowly switching from fossil fuels to cleaner renewable energy. But this isn’t a switch that will happen overnight. In fact, even with this switch, some old players in this industry will continue to do quite well after we ease off oil, coal and gas.

Today, let’s look at two of these kinds of retirement-friendly income payers.

Why Pay Utility Bills When You Can Cash Utility Checks?

The first is National Grid plc (NYSE:NGG). As you can guess from the name, the company runs power grids in the UK and US. It also controls a small monopoly on natural gas networks in both countries (all of the UK and just in the Northeast in the US).

This kind of business model makes for a terrific income generator. We’ve discussed before some of the highlights to owning electric utilities. With National Grid, you get all that plus the same benefits from natural gas networks as well.

The company has steadily grown over the years as they invest in new markets. Most of the growth has gone to pay shareholders in biannual distributions. Currently each share of NGG yields about 5.7% in income distributions per year. That’s more than triple the average S&P 500 stock.

The rest of its growing income has gone back into smart power grids and efficient billing. Meaning, the company is prepared to keep its position for a long, long time. That’s exactly the kind of thing we need to look for as we build our retirement accounts.

You Don’t Need to be the Beverly Hillbillies to Make Your Oil Fortune

The second opportunity we want to highlight is pipeline companies. Yes, they can be a bit controversial if they decide to build in the wrong place at the wrong time. We all know the arguments on both sides about the Keystone pipeline and others. But that’s actually quite a rare phenomenon with these companies.

You see, most of the pipelines that carry oil and gas throughout the US was built decades ago. They are quite expensive to build, but relatively inexpensive to maintain. So, upgrading and maintaining them is a much safer bet than building new ones for a business.

Like utilities, they offer the same kind of monopolistic control over their markets. The cost to lay new pipelines is prohibitive to competition, just like trying to build a second power grid to compete with one already in place.

That’s why companies like Spectra Energy Partners, LP (NYSE:SEP) offer such a great opportunity to those looking to build income into their retirement savings.

Spectra claims “assets [including] more than 15,000 miles of transmission pipelines, 170 billion cubic feet of natural gas storage and approximately 5.6 million barrels of crude oil storage.” That’s quite a network. But what really makes a company like Spectra so appealing when looking for safe, reliable income producers is its “pass-through” nature.

Here, we mean two things. First, the company’s business is literally a pass-through venture. It doesn’t drill for oil and hope to strike it big like the Beverly Hillbillies. Nor does it need to risk price fluctuations from the other side of the oil and gas market with refinery costs and consumer demand. It simply moves these resources from place to place. Most of its income is locked in by long term contracts. So, like National Grid, it doesn’t have to worry too much about the short term.

The second reason why Spectra and others like it are “pass-through” by nature is how they are financial positioned. They are limited partnerships, which allow them to pass-through all or nearly all of the income they receive from these ongoing transportation contracts directly to investors without taxes.

This allows for larger than average dividends and distributions. Right now, Spectra pays out 8.9%. That’s a staggering amount, compared to the 1.9% other companies are offering these days.

So, when you stop to think about the loss of defined benefit plans and how you are going to build your own nest egg to replace them for your retirement, consider these types of alternatives. They offer long-term stability, large economic moats and even larger income streams.

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