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

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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FI FighterDividend MantraCompounding IncomeJC @PassiveIncomePursuitDividend Growth Machine Recent comment authors
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Dividend Growth Machine
Guest

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.

JC @PassiveIncomePursuit
Guest

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%

Compounding Income
Guest

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.

Dividend Mantra
Guest

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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