Investors are finally starting to see the market volatility that contrarians have been waiting for, which presents an opportunity to invest in a cheap energy fund offering a 9.1% dividend. Despite many believing that the energy sector is played out, there has been a “slow-mo” selloff in crude oil prices, with a 10% decrease since early April. The Biden Administration’s decision to empty the Northeast Gasoline Supply Reserve, containing a million barrels of gas, will likely impact the market during the summer driving season.
Furthermore, the administration’s drawdown of the Strategic Petroleum Reserve (SPR) has been artificially controlling oil prices for the past couple of years. Although the SPR will need to be refilled in the future, it is unlikely to happen before the election to avoid spiking gas prices. After the election, it is expected that Uncle Sam will become a buyer, potentially leading to higher oil prices. This presents a smart buying opportunity as the SPR begins to slightly nudge higher, particularly when utilizing a closed-end fund (CEF) like the Kayne Anderson Energy Infrastructure Fund (KYN).
KYN currently offers a 15% discount to its net asset value (NAV), providing investors with the opportunity to access oil and gas companies like Williams Companies (WMB), Energy Transfer LP (ET), and Enterprise Products Partners (EPD) at a lower price compared to buying them directly on the market. These discounts are unique to CEFs and offer additional upside potential as rates normalize. The majority of KYN’s returns come from dividends, which currently yield 9.2% and have been growing since the early 2020s. Additionally, many of KYN’s holdings are master limited partnerships (MLPs), which simplify tax reporting for investors by providing a Form 1099 instead of a complicated K-1 package.
The companies owned by KYN are considered “toll bridges” that will benefit as the government restocks its reserves and consumers increase their travel with more spending power due to falling interest rates. The fund’s high dividend payout, coupled with the discounts on its portfolio holdings, make it an attractive investment option for contrarians looking to capitalize on the market volatility in the energy sector. As the market continues to evolve and respond to government actions, investors can position themselves to potentially benefit from higher oil prices post-election by investing in KYN.
