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Thu. May. 29, 2008

Are Transportation Costs Getting You Down? *

There once were twin boys that were very different. One had a positive outlook on life while the other was negative about anything he encountered. At age 5 the parents took the boys to see a psychologist to try and understand how twins could be so different. After several sessions the psychologist tried to “cure” both boys. He placed the negative boy in a well-lit room full of candy, pastries, toys and anything else a 5 year old boy could ever want. The positive boy was placed in a dark room full of rancid horse manure.

After about 4 hours the psychologist told the parents he was certain the boys had been cured and they all went to check on them. Not having touched anything in the room, the negative boy was was still sitting where he was left crying and unhappy. Disappointed the psychologist led the parents toward the room where the positive boy was. As they approached the room, they heard a flop, flop, flop sound. They peered through the window in the door and saw horse manure on the walls and on the ceiling. The boy was in the midst of the manure digging as fast as he could. The parents opened the door and asked what he was doing? The boy replied, “With this much poop, I just know there must be a pony in this room and I’m going to find it!”

The increasing costs of transportation has affected all of our lives to one degree or another. Individually, there is nothing we can do about the price of fuel. But like the positive boy above is there something we can do to make the best of a bad situation? I will leave the conservation tips to those more qualified to speak on them.

For several years I have been trying to add an energy stock to my income portfolio. I have some value friends that bought Exxon Mobil (XOM) and Chevron (CVX) about three years ago. They have done well. CVX is up about 80% while XOM is up about 60%. From an income perspective, I couldn’t make the numbers work then and the stocks have only become more expensive. Energy stocks can be emotional which leads to volatility.

From mid to late March energy stocks pulled back some. I ran my analysis on XOM and CVX, but still couldn’t make the numbers work. On a whim I ran the analysis on BP, and to my surprise they worked. I purchased BP on April 2nd at $62.19/share. At the time of purchase it had a 5.17% yield.

Granted BP is not quite as blue-chip as XOM and CVX, but it gave me the entry into the energy sector that I was looking for at an astounding yield. Since that time BP share price has risen about 15-20% as oil prices have escalated and has out-performed both CVX and XOM. Granted, I got to the party late, but I was able to come on my own terms without having to compromise my standards.

What now? I am sure there is another pony in the rancid fuel crisis, and I am going to find it!

At the time of this writing, I owned shares of BP (1.6% of my income portfolio).

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8 Responses to “Are Transportation Costs Getting You Down? *”

  1. Jake (Dividend Investing Blog) says:

    Good story. I would recommend looking at a propane company. I recently read an article that indicated people have brand loyalty to propane once they are hooked up.

    I ran a stock screen last week and came up with Suburban Propane Partners (SPH). High dividend yield and it has been growing since they started paying it out in 1997. I took a bite.

  2. passivefamilyincome says:

    Very motivating post. I like the thinking of actually taking advantage of the high energy costs by looking for stocks that can help hedge these costs. I look forward to learning more about your findings.

  3. Dividend Growth Investor says:

    What about KMP, TPP. They are somewhat energy related. I also couldn’t make up my mind about XOM.. Seems a little rich to me..Maybe if it fell below $80..

  4. Div Guy says:

    I sold YPF today. I have held the stock for around a year and made over a 15% return. I still have a small holding of XOM that I have had for a few years now. I think oil prices will start coming back down after the summer. That is my guess for what it’s worth.

    TPP looks very interesting but I own quite a bit of KMP already.

  5. MG (moneygardener) says:

    In my opinion the price of oil does not matter when determining a good entry point for energy firms.

    The best indicator is perception. When the sentiment exists that oil is going back down to $60/barrel that is when you buy if you’re bullish on oil long term. Good prices will not be had until the current sentiment shifts once again, as it always does.

  6. Anonymous says:

    Until a month ago, we owned BP and XOM. Recently sold our XOM @$90.35/share. Our basis was $54/share. Didn’t want to be greedy and get burned! We’re hanging on to the BP since they pay a good dividend and they are diversifying into other energy sources.

  7. Dividends4Life says:

    Jake: I actually owned SPH a while back. After doing my taxes the first year, I swore off Master limited Partnerships (MLP)

    passivefamilyincome: Thanks for your kind words.

    Dividend Growth Investor: See my comment to Jake – no more MLPs for me.

    Div Guy: I think the oil prices will come down, but they will remain much higher than historical averages. The days of cheap gas are gone.

    mg: I agree, oil price does not matter. I look at the value of the stock.

    Anon: If BP can grow its dividend, it will be hard to go wrong with it.

    Best Wishes,
    D4L

  8. TheLocoMono says:

    Excellent post, I enjoyed the moral of the story. I need to take the same approach when the time comes.

    It is all about motivation and effort. There was a bit in the news about Penn Virgina finding a large supply of natural gas in Texas which has potential to boost its revenue for a while.