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One of The Motley Fool's goals is to teach investors to invest sustainably. Specifically, this means investing with solid fundamental principles that have worked in the past and are likely to work in the future as well. One of these principles is the importance of dividend/distribution yield (and reinvestment) and how it can help investors achieve financial independence during retirement. 

A rule of thumb for retirement is that individuals should cash out no more than 4% of their portfolio annually to live on (to avoid running out of money). My goal is to help investors avoid selling shares (or units) of great companies and live exclusively off dividends/distributions. This requires two things.

First, a yield of 4% or greater and second, dividend/distribution growth greater than 4% (to outpace inflation and preserve buying power). Inflation has averaged 3.22% since 1913 and about 2% since 2000. So a 4% growth rate is double the rate of recent inflation. 

Of course, the 4% rule of thumb assumes an investor has a portfolio of sufficient size (4% yield on $750,000 portfolio=$30,000/year in retirement), and many people haven't been able to save that much. Thus, I'm always on the hunt for great companies that yield more than 4%, preferably double that (8%) or more, to help less affluent investors thrive during retirement. 

One final criteria I like to see is monthly dividend/distribution payments. Bills and other living expenses must be paid on a monthly basis so it's nice to see companies pay on the same schedule. 

The following two companies offer income investors of all kinds (both young and old) high, secure yields and strong long-term distribution growth prospects.

Vanguard Natural Resources (NASDAQ: VNR  ) is a fast-growing E&P (exploration and production) MLP that focuses primarily on gas production. The fundamental growth story that is likely to fuel its strong distribution growth (5.78% CAGR over the last seven years) can be summarized in three parts.

First, Vanguard is a master of accretive acquisitions. Since IPOing in 2006 the partnership has made 20 purchases totaling $3.4 billion. Its most recent, a $581 million acquisition of Wyoming natural gas fields, increases its total reserves by 80% and production by 55%. Management has since announced an aggressive investment program to increase production yet further.

The second catalyst is dropping production costs. Due to increased economies of scale Vanguard is guiding for 2014 production costs of just $6-$7/barrel of oil equivalent, a 50% decrease from 2011 levels. Current production is also aggressively hedged at very favorable levels: 80% of gas through 2017 hedged at $4.42/Mbtu, 80% of oil through 2015 hedged at $93.07/barrel. These hedges represent a 30% and 12.7% increase in gas and oil prices over what the partnership received in 2013.

Due to its aggressive growth strategy (both acquisition-fueled and organic) the partnership is guiding for:

  • 2014 production to increase by 46%-56% 
  • 2014 Adjusted EBITDA to increase by 30%
  • Capital expenditure (capex) to increase of $57 million

Given the guidance capex figures we can determine a likely $48 million in additional distributable cash flow in 2014. This would raise the distribution coverage ratio from 1 in 2013 to 1.24, ensuring distribution security, and allowing for solid growth going forward.

QR Energy (NYSE: QRE  ) is a smaller and newer E&P MLP, one primarily focused on oil (68% of reserves) as opposed to natural gas. The partnership is well situated to take advantage of the oil boom in the Permian Basin  in east Texas, the Woodford Shale in Oklahoma, and along the Gulf Coast. The distribution growth story for QRE can be summarized in two points. 

First, the partnership's small size creates a small base to grow quickly from. For example, in the third quarter of 2013 revenues increased by 20% and distributable cash flow (DCF) by 26%. When combined with the second catalyst, future distribution growth seems likely. 

The second catalyst is the partnership's recent buyout of its general partner. This ended the very unitholder-unfriendly management fee structure in which management was paid in unit grants that diluted existing investors (up to 10% per quarter). The terms of the buyout include one final 20% dilution, but spaced out over four years. The deal is immediately 7% accretive to DCF/unit, and with the distribution coverage ratio at a healthy 1.2 future distribution growth should be strong. 

Foolish takeaway
Both Vanguard Natural Resources and QRE Energy make for fantastic long-term investments -- no matter what stage in life an investor is in. Young investors can benefit from high yields and monthly compounding to grow wealth while retirees can enjoy secure, monthly income to cover living expenses. Both companies enjoy strong growth catalysts, secure distributions, and distribution growth rates that are likely to preserve and grow wealth over time. 

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Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2014, at 5:44 PM, emailnodata wrote:

    At a cursory glance my first concern would be that solar just skyrockets and kicks oil to the curb.

    The day MAY come when Big Daddy cruises home in his big black electric peckem'up truck, plugs it in to his home battery pack, and never bothers with a gas station again as he never drives more than 100 miles in a day...and that high-torque electric motor is just fine.

  • Report this Comment On April 30, 2014, at 5:49 PM, emailnodata wrote:

    BTW, this post is for you smart ones (the few, the proud)....IMO your first few years or retirement are the key: re-invest all that you can from your pensions, your social security,and your forced withdrawals.

    Keep in mind, you are NOT responsible for your adult children's finances, nor the grand-kids. You are also NOT required to listen to spousey's constant whining to travel to god knows where and piss away every penny you bring in. Your budget has to be as disciplined in retirement as it is in pre-retirement, if not more.

    Odds are you are a male, and you will croak ten years (at least) before the old lady. Sad to say, but you should make sure the old hag is in good shape when you DO pass she can finally live the life she'd rather live anyway, fun and without you!!

    Good luck boys.

  • Report this Comment On April 30, 2014, at 10:31 PM, AdamGalas wrote:

    True, electric vehicles will replace gas one day, but that is still a ways off.

    Kudos on your dedication to strict discipline in retirement. Its always best to live off just part of your dividend/distribution income and have some to reinvest. That way your buying power/income is always increasing and you never run out of money, no matter how long you may live.

  • Report this Comment On April 30, 2014, at 10:33 PM, AdamGalas wrote:

    Electric cars will one day replace gas ones, but that's a far distant future.

    As for your views on strict spending discipline during retirement, well I agree wholeheartedly.

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Adam Galas

Adam Galas is an energy writer for The Motley Fool and a retired Army Medical Services Officer. After serving his country in the global war on terror, he has come home to serve investors by teaching them how to invest better in order to achieve their financial dreams.

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