It seems like every week there's a new development that forces investors to rethink their investment strategies.
This week we will see the initial consequences of the weekend's all-important Group of 20 (G20) meeting. A lot of very important issues are up for debate among the world's top 20 countries, as are policies that will shape the intensity and distribution of global growth in the months and years ahead.
The meeting will be fraught with controversy as each economy is proceeding at its own distinct pace of growth and faces its own set of challenges.
China, which recently showed a superlative 50% year-over-year increase in exports, has run out of excuses to justify its undervalued currency. The country also is facing strong inflationary pressures, which include labor strikes by workers demanding higher pay.
That's why the Chinese government last week finally made its currency policy more flexible. The orderly appreciation that China will allow its currency will help control domestic inflation and further stimulate local demand. Chinese consumers will demand more imports from the West and therefore help rebalance growth in the world. It bodes well for other emerging markets and commodities-exporting nations, as well.
Meanwhile, Congress on Friday agreed to a historic overhaul of U.S. financial regulations. While limiting many risky activities, banks and other financial institutions avoided the comprehensive bans that many had feared.
Finally, Europe is dealing with its sovereign debt crisis, which has important implications for the continent's banking industry.
The G20 will move forward with global rules on banking, under its Basel III initiative. The tougher capitalization and liquidity requirements being discussed pose a risk to the global recovery, because they could force banks to restrain credit or dispose of assets in order to comply. Therefore, the extent and timing of such reforms are critical to the future course of the global economy.
With so much uncertainty surrounding the changing regulatory environment and its possible effect on banks and economies, we are going to take pause and focus on stability and a high-yielding dividend.
That brings us to Enbridge Energy Partners, L.P. (NYSE: EEP).
Enbridge delivers very stable earnings time after time and it's a company that doesn't mind giving profits back to the shareholder. EEP is a master limited partnership (MLP) that owns crude oil and natural gas pipelines – including oil pipelines that bring Canadian crude down to the United States and gas pipelines woven throughout East and North Texas – as well as natural gas storage and processing facilities.
Do not get hung up on the MLP structure – it is something that we can take full advantage off.
For example, MLPs are contractually obligated to pay a quarterly required distribution (QRD). And with the company's superlative revenue and profit stability, the degree of certainty concerning that payment is very high. Also, MLPs are able to distribute these earnings without paying Federal or State taxes!
And the investor, who is really a partner, is able to reduce their own tax liabilities by discounting their proportion of the MLP's depreciation.
All of this sounds too good to be true, but it is right there for us to take full advantage of. The reason for such beneficial tax treatment is to facilitate this critical aspect of U.S. energy policy.
Enbridge's business may be boring, but there are extra efficiencies to be gained by managing a boring business. And Enbridge has a habit of exploiting those efficiencies in recent quarters to beat analysts' estimates. That could mean a 1% surprise increase in its planned distributions, like the one announced recently.
Now, ahead of the company's earnings report – after the market closes on July 23rd – investors can get safely into this stock that has recently traded down, increasing its dividend yield to a whopping 7.6%. And remember that you will be able to reduce the tax impact to you even more (please consult your tax advisor), by using the depreciation allocation of the partnership in your own tax return.
That's the game with Enbridge. Hold the stock long term, enjoy your 7.6% dividend, and disregard occasional volatility in the stock price.
Once we have a clearer picture of the global economy in terms of global financial regulation and policy adjustments, we can become more aggressive in taking advantage of the favored trends.
Recommendation: Buy Enbridge Energy, L.P. (NYSE: EEP) at market (**).
(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Enbridge Energy, L.P.
[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big – a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown – a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]
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