Portfolio Update: New Addition (LNCO; November 1, 2012)

by FI Fighter on November 1, 2012

in Stock Portfolio Updates

What better way to kick-start a new month than by making a new purchase? As some readers may know, one stock that I have been eyeing for quite some time now is McDonald’s (MCD). This blue-chip has taken quite a fall as of late, and the stock is steadily approaching its 52 week low. This makes MCD the most logical choice for my latest purchase, without a doubt.

However, this time around, I decided to take the contrarian route and pick up a stock heading in the opposite direction – UP! This company is peaking, and its shares are at 52 week highs. This is another company that I have been targeting for a long time, so today I finally did it, pulled the trigger, and purchased 63 shares of LinnCO LLC (LNCO) for a price of $39.15/share.

For those unfamiliar with LNCO, it’s a new offering that just recently hit the market on October 20. LNCO is a wholly-owned subsidiary of Linn Energy LLC (LINE). Basically, the sole purpose of LNCO is to purchase units (shares) of LINE. Essentially, they are joined at the hip, so their performances should mirror each other.

Linn Energy is an upstream, independent oil and natural gas company focused on development, and production. Currently, its oil and gas prices are 100% hedged until 2016. Management seems to have made the right move, as Linn Energy is able to sell for a much higher price than the current market rate.

One of the main attractions pulling investors to invest in LNCO over LINE is that there are no complicated K-1 tax filings to deal with (most beneficial for those buying into an IRA). Wheras LINE follows more traditional MLP rules, the payouts from LNCO are treated as dividends, not distributions. As such, by purchasing LNCO, you simply report your dividends on a standard 1099 form. LNCO is great for those (like me) who want to invest in a solid company like LINE, but don’t want to deal with any headaches come tax season.

An initial 30,250,000 common shares of LNCO were made available at $36.50/share. I missed the first opportunity as I was unaware that LNCO was now available to the public. I had read about it many months before, but lost track of it completely. Had I known sooner, I would have definitely jumped in from the onset of Day 1.

But not all is lost. In fact, by purchasing today, I got in one day before LNCO goes ex-dividend, which means that I will be qualified for its first ever dividend payout on November 15! Yes, I know, this doesn’t really mean much, but this will be the first stock I’ve owned where I can say that I got in right at the beginning. Hopefully I’ll be able to look back fondly on this moment in 10-20 years.

The current yield for LNCO is about 7.2%. By adding 63 shares, I will add $178.92/year in dividends to the Early Financial Independence fund.

Although I really wanted to add MCD, that purchase will just have to wait until next time. I figured I have more time to get MCD since it doesn’t go ex-dividend until the end of November. By locking in LNCO before it went ex-dividend, I get to knock off $44.73 off my cost basis. Hopefully MCD will still be cheap next time around!

Here are the technicals for LINE (since LNCO doesn’t have much of a history yet), assuming an investment start date in January 2006:

 

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{ 8 comments… read them below or add one }

1 Dividend Growth MachineNo Gravatar November 1, 2012 at 6:20 pm

Nice purchase! I also noticed LNCO recently, but I haven’t taken the time yet to research it. However, from the little bit that I’ve read, it looks like a good investment.

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2 FI FighterNo Gravatar November 3, 2012 at 7:32 pm

DGM,

Thanks! I hope I am able to hit one out of the ballpark with this one. LNCO is somewhat more risky, but they seem to have a very strong management team in place. They’ve been profiting handsomely while natural gas prices have been sitting at near historic lows.

Cheers!

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3 JC @PassiveIncomePursuitNo Gravatar November 2, 2012 at 10:33 am

Interesting. Its always good to find out about new potential DG stocks. If they’re able to grow that satarting yield in the high single to low double digits then you got a great steal there starting at 7.2%

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4 FI FighterNo Gravatar November 3, 2012 at 7:35 pm

JC,

Yeah, the dividend yield is almost mind numbing. If you had started with $5000 invested in LINE in 2006, you would have purchased ~227 shares and received about $3500 in dividends.

The question is, can they keep this up? What happens when natural gas prices rebound or take off? Right now, their natural gas is hedged until 2017, and crude oil until 2016.

Best wishes!

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5 Compounding IncomeNo Gravatar November 2, 2012 at 5:41 pm

Interesting purchase. I like LNCO because it trades at a discount to LINE and the dividend is about the same. I thought taxes would be higher. I wonder if LNCO will eventually trade at a premium?

LINE has been a fantastic holding for me, although I’ve only owned it since May. Personally I think the K-1 tax annoyance is blown out of proportion. It was easy enough to do last year, anyone with average intelligence could do it on turbo tax. I was expecting major headaches which never happened. It could become a problem in a large portfolio because then you might have to deal with filing in multiple states and such. I sold a MLP this year and will learn even more about the tax code, last year I just held.

Anyways good buy, I might add LNCO to my ROTH sometime.

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6 FI FighterNo Gravatar November 3, 2012 at 7:41 pm

CI,

Good point about LNCO trading at a discount to LINE. Maybe it’s because LNCO is still a relatively new entity and still flying under the radar? I wonder for how long it will trade below LINE. The dividends are near identical, so at present, LNCO will give you the higher yield.

Yeah, I’ve heard the whole K-1 tax thing has been blown out of proportion. Although I do hear that holding an MLP in an IRA can be more troubling since you have to deal with UBTI when you sell.

In general, I’m not opposed to owning MLP’s if there are no other options. For example, I want to own EPD eventually, so I’ll deal with the K-1 if I have to. OTOH, if there are other means to purchase these MLP’s, such as through LNCO instead of LINE, or KMI instead of KMP, then I’m going to take the path of least resistance and avoid the K-1 😉

Best wishes!

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7 Dividend MantraNo Gravatar November 3, 2012 at 5:57 pm

FI Fighter,

Great stuff. Gotta love that high yield!

I looked into LNCO recently through their shareholder overview:

http://files.shareholder.com/downloads/LINE/2090818384x0x605006/8289D0B0-4288-4E3B-8AE3-44B0BB4000DF/LinnCo_Overview.pdf

Interesting stuff. I’m not sure I could make a stab at it, as LINE hasn’t grown distributions for a significant period of time, but it does say a lot that they didn’t cut distributions during the fall in natural gas prices.

It looks to be a solid play, but I’d have to do further research into it to make sure I fully understand their operations. The lack of distribution growth may preclude me from investing in this one.

Great job growing the portfolio some more and starting the month off with a bang!

Best wishes!

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8 FI FighterNo Gravatar November 3, 2012 at 7:47 pm

DM,

Yeah, I would agree that LNCO/LINE definitely aren’t as proven as many other potentially “safer” dividend growth stocks. It’s a riskier play, and since being burned by Exelon, I’m starting to become just a bit more leery toward taking gambles. I also own SDRL, which doesn’t exactly allow me to sleep soundly at night.

However, the company has been doing exceptionally well, and seems to have strong leadership in place. This is most evident in the fact that they’ve been one of the few companies that haven’t been hit by the fall in natural gas prices, but instead profiting since they are 100% hedged out until 2016-2017.

Take care!

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