Oil tanker stocks such as Nordic American Tankers (NYSE:NAT), Ship Finance International (NYSE:SFL), and Navios Maritime Midstream Partners (NYSE:NAP) are some of the highest yielding investments you can find. More importantly though, they operate in a vital global industry -- global oil transport -- that is expected to see enormous growth in coming decades due to soaring global oil demand.However, investors need to be aware that these stocks differ in three important areas that could determine whether or not you earn a profit in the long-term: their business models, fleet composition, and tax treatment.
Nordic American Tankers' business model is risky
Nordic American Tankers' dividend can fluctuate wildly because its 24 oil tankers all operate on a spot market basis, meaning each vessel is hired for a single trip, and the fee the company is paid can vary dramatically. For example, between June and July of 2014, the Suezmax -- Nordic American only operates this one class of tankers -- spot charter rate rose 123% before falling 71% just one month later in August.
While the spot rate for Suezmax tankers has soared recently -- allowing Nordic American to massively increase its dividend -- over the past five years Nordic American's reliance on spot market charter rates has resulted in total net losses of $265 million. This forced the company to slash its dividend repeatedly and sell additional shares to continue paying its dividends, which resulted in massive investor dilution and investment losses, even with the dividend payments taken into account.
If Suezmax spot charter rates hold up in the coming years, Nordic American may be able to sustain or even keep growing its dividend and the stock might soar. However, investors should be aware that this oil tanker stock's focus on purely spot market rates means its a relatively speculative investment, especially compared to Ship Finance International -- which was better able to sustain its dividend and keep up with the S&P 500 over the past decade.
Ship Finance's highly diversified fleet makes for smoother dividends
Ship Finance is one of my favorite shipping stocks because it offers investors exposure to numerous shipping markets through its eight classes of ships:
- Suezmax oil tankers
- VLCC oil tankers
- dry goods bulk carriers
- container ships
- offshore oil rigs
- offshore oil rig supply ships
- chemical transport ships
- car carriers
Ship Finance focuses on medium-long-term fixed charters, ensuring more predictable and consistent cash flow that allows for a more stable dividend, which can result in superior long-term total returns compared to highly volatile dividend payers like Nordic American.
While Ship Finance's business model is less volatile than Nordic American's investors need to be aware that the company derives the majority of its charter revenue from the offshore drilling industry.
Ship Finance is working hard to diversify its fleet -- for example in Q4 of 2014 it sold an offshore oil rig and took delivery of four large container ships with seven year charters -- the company's fortunes will remain largely tied to the offshore drilling industry which may not recover for the next couple of years. This makes Ship Finance a medium risky investment. For even more risk averse investors, I think Navios Maritime Midstream Partners deserves consideration.
Navios Maritime: long-term charters mean less risk but comes with tax complications
Navios Maritime Midstream Partners is a recently IPOed MLP that represents a pure play on VLCC, or "very large crude carrier", oil tankers. It went public with a fleet of four oil tankers, but has substantial growth potential thanks to potential drop downs from its general partner.
Navios Maritime Midstream represents the least risky investment of these three oil tanker stocks, as it only acquires tankers with long-term charters -- an average of 7.2 years at IPO -- already in place.
In fact 100% of its available 2015 and 2016 charter days are fully chartered, providing excellent medium-term cash flow predictability to support its generous distribution.
However, as with all MLPs, there are two main tax complications that investors need to be aware of and consider.
Takeaway: oil tankers stocks offer high yields, but those can come at a cost
Oil tanker stocks can be a great way to boost the overall yield of a diversified income portfolio. However, investors need to do their homework before buying these investments, because each has its own pros and cons, making it better or worse suited to individual time frames, risk profiles, and tax situations.
Adam Galas has no position in any stocks mentioned, however, he does lead The Grand Adventure dividend project, which recommends Navios Maritime Midstream Partners. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.