2015 will be different from 2014 because of one crucial reason: the recent collapse of oil prices.
Consequently, the returns from once-favored income shelters, particularly energy master limited partnerships (MLPs), are highly uncertain.
In addition, it now seems that Janet Yellen's merry men at the Fed will pluck up the courage to raise interest rates, which, after being at zero for seven years, ought to cause a few ructions in the market.
As income investors seeking solid dividends and a quiet life, we therefore need to reassess our portfolios for the New Year.
Economically, the track for 2015 is fairly well established.
Oil prices have crashed, and the effects will work their way through the global economy. Prices are unlikely to recover much in 2015, and could decline even further, though probably not for long.
Meanwhile, the Fed will raise interest rates, but probably very slowly, and not until at least April. The U.S. and global economies will continue expanding at a satisfactory rate, at least for the first half of the year. There's some chance of trouble in the second half.
Oil Prices Have Changed Our Strategy
In the energy sector, MLPs with oil reserves are in trouble. However, this will be disguised initially by the massive hedging programs that most production MLPs undertake, which allow them to report huge profits on their derivatives positions even as prices decline. Linn Energy's (LINE) best quarter ever, for example, was the last quarter of 2008, when prices fell like a rock.
Thus, in spite of some crazy accounting, the reality is clear: The value of these companies' reserves has just fallen sharply, and once their derivatives portfolios have run off, their cash flows will crash, as well. Since they have a habit of paying dividends out of cash flow, their dividends will follow suit.
Conversely, refineries will do well in an environment of lower prices (because volumes will increase) and especially well when oil prices are in decline, because margins will also increase. Refinery MLPs such as Northern Tier Energy LP (NTI) should pay out extra-juicy dividends for the fourth quarter, declared in February. NTI currently has a yield of 18.1%, based on the past four dividends, so income seekers invested in this one could enjoy a bountiful early spring.
