TC Pipelines, LP: Earn a 12.3% Yield From This “Irreplaceable Asset”
April 6, 2018
This Asset Pays Out 12.3%
Today’s post highlights my favorite place to find safe, oversized yields: “irreplaceable assets.”
Irreplaceable assets constitute businesses that can’t be easily replicated. No one can come along and build a competing operation right next door.
Think about famous landmarks like the Hoover Dam, the Chrysler Building, or the Golden Gate bridge. Even if you and I could cough up billions of dollars, it would be tough (sometimes outright impossible) to replicate these assets from scratch. Thanks to this entrenched market position, owners of “irreplaceable assets” often earn outsized returns.
Of course, you can’t own any of these particular buildings. Savvy investors took these assets private years ago (or the government keeps them under lock and key). But in some rare cases, these wonderful businesses still trade on the public market.
Case in point: TC Pipelines, LP (NYSE:TCP). This partnership owns more than 6,300 miles of pipelines across the continent, moving some 9.4 billion cubic feet of natural gas daily. And with a dividend yield topping 12.3%, it represents the power of sticking irreplaceable assets in your portfolio.
Analysts have long prized pipelines, and for good reason. These long steel tubes connect supply basins with customers in distant markets. TC Pipelines simply earns a fee on each cubic foot of gas that passes through its network, almost like a highway tollbooth.
Once you have a pipeline in place, no other method of transportation, including trucks and rail, can compete. These assets constitute the single cheapest way of moving oil and gas across the country. So, in effect, the only true competition to a pipeline would be another route running directly alongside it.
But even if you wanted to build a rival line, it’s often difficult to pull off. New pipelines cost billions of dollars to construct, and even if a deep-pocketed investor wanted to front that kind of money, it’s often difficult to secure the needed rights-of-way.
Worse, any new route would only split the existing business. This would present an unprofitable situation for both parties involved. For this reason, incumbent pipelines rarely face direct competition.
For unitholders, this has been quite a profitable proposition. Over the past few decades, TC Pipelines has generated between $0.15 and $0.20 in profit on every dollar of capital invested into the business. I can only point to a handful of businesses in the world that have sustained profits quite this high.
Most of these profits get passed on to owners. Since 1999, TC Pipelines has grown its payout at a 4.2% annual clip. Today, the partnership pays out a quarterly distribution of $1.00 per unit, which comes out to an annual yield of 12.3%.
(Source: “Investor Center,” TC Pipelines, LP, last accessed April 5, 2018.)
Of course, you have no sure things when it comes to investing. Stocks fall in and out of fashion on Wall Street. Fears of a U.S.-China trade war have gotten analysts in a tizzy, for obvious reasons.
But when you own a portfolio of irreplaceable assets, you have a lot less to worry about. If history is any guide, these businesses will power through the downturns while cranking out income for owners. For that reason, I would keep a wonderful operation like TC Pipelines, LP on my watchlist.
