The closest you can get to a sure thing in the energy business is pipelines. They are essential and “moaty.” Those two qualities make them the energy sector’s only slam-dunk investments. And don’t worry, I’ll explain what I mean by “moaty” in a moment.

First of all, pipelines are essential. Every drop of oil and every cubic foot of natural gas at some point has to flow through a pipeline. Trucks and trains carry their share as well, but pipelines carry the bulk. Without them, it would be a cold winter for many Northerners and our cars would sit with empty tanks.

Pipelines’ essential nature also makes them the lowest-risk play in gas and oil. The average cost for an exploration and production (E&P) company to drill just one hole is $5 million to $9.3 million. If it drills in the wrong location, the losses can be catastrophic.

But there is no E&P risk when pipelines transport oil and gas. The product has to get to the refineries, wholesalers and retailers – and it is the pipes that take it there. And energy transportation is a moaty industry. That fact ratchets up the company’s value and safety even more.

Moaty means there are significant barriers to entry to the business and, as such, few competitors. Competition in this business does not pop up out of nowhere.

The legal barriers alone are huge. Construction is wrought with environmental and regulatory issues, and new lines are approved only when there is an economic need. Case in point? The Keystone pipeline project during the Obama years.

And E&P capital costs are staggering. A land pipeline costs $6.57 million per mile, and construction costs in the hottest production areas are skyrocketing.

Add to this equation the three years it takes to build just one run of pipe, and you can understand why there aren’t many hats in this ring.

So this month, let’s buy a bond from a slam-dunk pipeline company: Plains All American Pipeline (NYSE: PAA).

Plains All American is one of the dominant players in the pipeline business. It has total distribution and delivery assets that include 20,000 miles of pipelines, 142 million barrels of liquids storage, 97 billion cubic feet of natural gas storage, 10 billion cubic feet per day of gathering capacity, and railcars and trucks.

This is a $14 billion company that has a dominant role in the Permian Basin in West Texas. And I expect massive growth over the next 20 to 30 years.

At current levels, it is estimated that Plains All American’s pipes touch every barrel of oil in the Permian. The company has 4,600 miles of pipeline in that region, and those account for 60% of its current volume.

In three to five years, Plains All American’s Permian flow is expected to rise to 70% of its total volume.

And the Permian isn’t just today’s hottest oil field...

In terms of its reservoir quality, the region is unique among U.S. oil fields. And exploration has only begun. Currently, only three wells are being drilled per square mile in the Permian. Based on current estimates, the field can support 25 to 30 wells in the same area.

Production in the Basin is expected to double in the next five years. The area has 20 to 30 years of drilling potential and 30-plus years of reserves to work through. And Plains All American will profit from almost every drop that leaves the Permian.

According to the analysts, Plains All American’s biggest problem going forward will be how it will handle the unexpected increase in the flow across its lines. Most believe Plains All American has seriously underestimated the flow growth potential in the Permian and could
be overwhelmed.

Just this past quarter, the company reported 22.8% growth in revenues.

It expects a 202% increase in earnings growth this year and a 51.5% per year increase for the next five years.

I’d be hard-pressed to guess what the earnings growth will look like with the estimated near-term double in the flow over existing lines from just its Permian customers.

Plains All American covers 16% of its debt with just current cash flow – a very comfortable figure.

And as a reality check, Plains All American’s earnings growth for the past five years was -23.29%.

But that is expected to change dramatically as the company’s exposure to the Permian causes growth to explode. Morningstar described its hold on the area as a virtual monopoly.

Let’s buy the Plains All American bond with a coupon of 4.5% that matures on December 15, 2026, at up to 103.5.

Its current price is 101. With the expected growth in revenues and earnings, we can pay up a little for this one.

The CUSIP is 72650rbl5, and it is rated BBB-. The yield to maturity at 101.4 is 4.3%.

Some investors may have a problem opting for a 4.3% yield rather than the fat 6%-plus dividend of the common stock. But I prefer the bond. Here’s why...

Over the last year, the stock has run between $18 and $33 per share. That’s an 83% swing and more than enough to drive the average guy to a “cut his losses” scenario. You don’t make money cutting losses.

The payout ratio on the common stock is 239% of its earnings. No company can do that for long. Near term, a dividend cut is very likely and, with it, the market price of the common stock will drop.

And remember, dividend cuts are positives for bonds. That’s because dividend cuts reduce the company’s costs and make cash and cash flow more readily available to pay the bond interest.

When the higher Permian numbers hit the street, the bond will see upward pricing pressure. That means we could be out of this long before maturity with a nice capital gain.

The Plains All American bond is truly a slam dunk in a low-risk industry with explosive growth.

Action to Take: Buy the Plains All American Pipeline 4.5% bond (CUSIP 72650rbl5) that matures on December 15, 2026, at up to 103.5, or $1,035 per bond, and add it to the Blue Chip Bond Portfolio.

The most successful options strategy I’ve ever used is put selling.

What gets my goat is that Wall Street has convinced so many people not to do it. And when Wall Street doesn’t want you to do something, it’s because it’s not in Wall Street’s best interest!

Let’s step back a minute and talk about what put selling is.

Put selling means agreeing to buy a stock at a certain price, by a certain date. When you sell the put, the stock is above that agreed upon price. If the stock falls below that price, you are obligated to purchase the stock. For that obligation, you can get paid a lot of money.

But if you trade options the way 99% of investors do, you will end up on the wrong side of the trade...

So you must understand what you’re doing.

That’s where I come in. I have done hundreds of put sells. I’ve written about the strategy for almost two decades. One of my former employees wrote a best-selling book about options after we designed a put selling program that thousands of people benefited from. And I have a put selling service called Automatic Trading Millionaire that has yet to experience a single losing trade.

I’m not saying any of this to boast. I merely want you to understand that I know the ins and outs of put selling – and that I will put my track record up against anyone’s in the business.

Like everyone else, I made the rookie mistakes. And I took the losses in trades I should not have made. Now, after two decades of put selling, I’m ready to share what I know so you can avoid the perils and pitfalls.

The first thing you need to do is have an account where you can sell puts. It’s not as easy as opening a regular account. Even though most brokers are clueless, they want to know you have experience trading options before they let you open an account...

Please understand what you are doing before you take that step. There’s a series in Wealthy Retirement that will help guide you through the process of put selling. You can access it here.

Think of it as a continuing education course that could be the best thing you ever do for your finances. When you talk to your broker, you need to speak their language and show them that you do understand what put selling is.

Also, be prepared to deal with margin. When you sell puts, you don’t spend any money. You get paid money. But you must have the ability to purchase the stock you sell puts on so the broker will allow you to use their money as collateral for the obligation. That is called margin.

You are required to put up around 15% of the amount you would need to buy the stock (if the put were triggered). The broker puts up the other 85% (the margin). Your return is calculated based on how much you get paid divided by the 15% you put up. For example, if you got paid $1 per share and you had to put up $1.50 per share, your return would be 66%. That’s if things go your way. And with my strategy, things will likely go your way most of the time.

Okay, let’s get to the actual strategy. I want to buy the best companies in the market at a discount to their current prices. I’m not talking about a 1% or 5% discount. I want to own shares 20% to 50% below where they are trading.

Imagine looking across the best companies in the market. You probably wish you had bought Apple (Nasdaq: AAPL) at $70 now that it’s at $170 or Newmont Mining (NYSE: NEM) 40% below the current price... or every stock that Warren Buffett bought this year for less than what he paid for them. It’s done every day by the 1% who know how to sell puts. You can be part of that 1%.

Here’s how...

First, pick high-quality companies. Don’t pick speculative techs or biotechs or story stocks. That’s how the 99% get into trouble. You’re smarter than that. Pick companies that you really wish were in your portfolio at prices well below where they are selling today.

Think about it... You can pick your price for your stock. And if you don’t get your stock at your price, you get paid for trying anyway. Worst case, you GET the stock you wanted to buy, and you get it at YOUR price. How is that for a worst-case scenario? Oh, and you still get to keep the cash you were paid upfront for taking on the obligation.

Second, scan the options chain for the company. The chain shows you all the prices that you can buy the stock for and how much you will get paid for contracting to buy it at a particular price. You want to pick the prices that give you a 20% to 50% discount to the current price.

Once you have picked your price and the amount that you will get, you sell that option, which allows you to buy the shares at your price. The only catch is that the shares must be at or below that price at expiration.

Hit the sell button to sell the puts. Like magic, the cash appears in your account. You didn’t buy a thing. And if you already have stocks in your account, they can be used as collateral for the 15% you need to put up.

Then, sit back and wait for the stock to come to you at your price. Remember, you may not get the stock, but you’ll get paid to wait and see.

If you follow the cardinal rule, the one that 99% of investors don’t follow, it’s really hard to lose. That rule is that you sell puts only on companies that you want
to own.

Period.

We believe it’s helpful to share questions and clarifications on dividend-investment strategies with all of our subscribers. Keep in mind, Marc can answer your general strategy and service questions, but he cannot give personalized advice. As always, feel free to send us your questions at mailbag@oxfordclub.com.

I am concerned about a market correction. Should I take out some gains (40%) from my stock portfolio in cash and dollar-cost average back in January?

– Sanjeev V.

If you need the money within the next three years, then yes, take the money out – whether you think a correction is coming or not. If you don’t need the money, then I recommend staying invested.

No one knows when the next correction or subsequent rebound is coming. Anyone who tells you they do know is either lying to you or to themselves. So timing the market for an expected correction and recovery is impossible. Don’t even try.

Could you please give me the pluses and minuses of mutual funds vs. ETFs?

– Steve D.

Generally, I’m not a fan of actively managed mutual funds, where a fund manager picks stocks. The overwhelming majority of fund managers underperform the market. However, I do like index funds, where the mutual fund simply tracks the index. The fees for index funds are usually quite low, whereas actively managed funds often have higher expenses.

It used to be that nearly all ETFs tracked some kind of index. Today, there are some actively managed ETFs. As with mutual funds, I’d stay away from the actively managed ones.

ETFs trade throughout the day like a stock. Mutual fund prices are set at the close of the market based on the net asset value (NAV) of the investments in the fund.

ETFs can be a bit more tax-efficient. Their structure allows them to avoid capital gain distributions, while the structure of mutual funds does not.

So mutual fund holders often get a capital gain distribution in December and then must pay tax on the distribution (unless the fund is held in a tax-deferred account).

What is your take on AT&T (NYSE: T) paying a 5% dividend but not doing much? Is this a good entry point or selling point? It looks like it has been up and down and sideways for over a year now. Thanks.

– Jim A.

As I write this, AT&T has hit a roadblock in its merger plans with Time Warner (NYSE: TWX). The U.S. Department of Justice surprised AT&T and said it must sell CNN if it wants the deal to go through.

AT&T’s CEO, Randall Stephenson, said he was never told that previously by the Department of Justice, and selling CNN makes no sense.

It’s anyone’s guess where this will go.

AT&T isn’t the kind of stock that’s going to triple in a year or two. It’s a “slow and steady wins the race” type of investment.

But with a 5% yield, a dividend that has grown every year for more than 30 years and a cash flow-rich business, I’m not too concerned.

Anything can happen in the short term, but long term I still really like AT&T and fully expect it to achieve the goals of the 10-11-12 System.

Marc, a recent article stressed a potential problem for AT&T is a huge unfunded pension debt. Do you foresee this as a problem?

I am 84 years old and rely heavily on your advice for dividends. Thanks.

– Ed D.

AT&T does have unfunded pension obligations. As of the end of 2016, AT&T’s pension had $42.6 billion in assets but $56.2 billion in projected obligations. So the difference between what it owes and what’s in the plan is significant.

But AT&T also has $48 billion in cash and generated $14 billion in free cash flow through the first nine months of the year. So it has the funds to pay employees what is owed. Additionally, if interest rates rise, the pension fund should earn more money, which will close the gap a bit.

So it’s a problem, but not one that is insurmountable or one that I’m worried about.

Can I use long-term options to control 100 shares on the ex-dividend date... and collect the dividend on the payment date two weeks later? Thanks.

– J.J.

No. Owning an option does not entitle you to the dividend. You must own the stock prior to the ex-dividend date in order to be paid the dividend.

I have noticed New Mountain Finance (NYSE: NMFC) has seen a significant drop in price and is getting close to its 52-week low. For those of us who did not get in before you put the stock on “Hold,” will you be issuing a new “Buy” alert?

– Kris M.

Not in the immediate future. The stock is still trading at a premium to its NAV.

As of the end of the third quarter, the NAV was $13.65. I’d like to see the stock trading closer to its NAV before moving it back to a “Buy.”

If you own the stock, continue to hold.

What are your thoughts about Buckeye Partners (NYSE: BPL) maintaining its dividend for the next couple of years?

– Bill J.

Through the first half of the year, Buckeye Partners covered its distribution, but barely.

The company generated $361 million in distributable cash flow (DCF), the measure of cash flow used by most master limited partnerships. It paid $356 million out in distributions.

Buckeye also raised its distribution by more than 4% in the third quarter, so it will need to grow DCF in order to afford what it is paying out.

For the full year, Buckeye’s DCF is expected to be $725 million, which will likely be as much as the company pays out in distributions.

DCF is expected to rise a few percentage points a year for the next several years. But any hiccup... and Buckeye’s distribution becomes unaffordable.