26% Yield From One Of The Largest Oil Companies On Earth
StreetAuthority | Apr 17, 2012 08:33AM ET
People often ask me about my most profitable investment.
It was an investment I made in October 1999. Today, it pays me a yield equivalent to 26%, and it has forever changed how I look for income opportunities.
In 1999, I was speaking at an economic conference in New York. During one of the breaks, I struck up a conversation with two gentlemen who happened to work in the oil and gas business. At the time, I was doing some consulting work for a lawsuit involving a number of large oil companies and had been knee-deep in oil price and production data.
Oil and natural gas prices had been on a steady 20-year decline following the "oil shock" of 1979. By the time 1999 rolled around, analysts had universally soured on the sector. Prices were going lower, they said. In March 1999, The Economist devoted a whole issue to the glut of world oil.
Discussing the future price for oil, The Economist said, "$10 [per barrel] might actually be too optimistic. We may be heading for $5."
In October 1999, I didn't agree with the analysts or the common view that oil prices were going to sink lower. As it turns out, neither did my newfound friends at the conference. Over the course of the meeting, we exchanged information and data to back up our thesis.
Immediately following that conference, I made an investment in Burlington Resources, an oil and gas company that was later bought by ConocoPhillips (NYSE: COP).
You can see what has happened to oil prices since then...
So why did my investment forever change how I looked for income opportunities?
I still hold a small position in COP. My cost basis is roughly $10 per share. With the shares trading at $73 today, I've seen a gain of more than 700%.
And while ConocoPhillips pays an annual dividend of $2.64 per share, for a yield of 3.6% today, my yield on cost is north of 26%.
That's because ConocoPhillips is one of the most relentless dividend payers on Earth. In 1999, when I first bought my stake in Burlington Northern (which then turned into my stake in Conoco), the stock paid a quarterly dividend of $0.17 per share. Today that dividend is $0.66 per share -- a 288% increase.
That's what has changed about my search for income.
Many income investors won't look twice at a stock yielding 3%. They want to own stocks that pay the highest yields right now. I don't blame them. I want the same thing.
ConocoPhillips is proof that when it comes to income, making big and lasting returns is not only about locking-in outsized yields. Sometimes you have to dig a little deeper to see how much potential a "low-yielding" stock like COP actually holds.
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