When it comes to income investing, buying the middleman often makes a lot of sense. It insulates you from the high-risk, high-reward avenue of the producer but also removes the risk of being consumer-facing, suggests Rida Morwa, editor of High Dividend Opportunities.
Consumers can be fickle at times. So Antero Midstream Corporation (AM) allow us to own the "toll roads" that basic goods must travel to get from the producers to the consumers.
Antero Midstream was created to serve the midstream needs of Antero Resources (AR), which specializes in natural gas (NG). Antero Midstream transports both NG and natural gas liquids (NGLs) for Antero Resources.
Like the vast majority of commodities this year, as inflation soars, the commodity prices go in the same direction. This is especially true for scarce commodities where we have seen under-investment in production for several years now. In the case of NG and NGLs, increased consumer demand has put even higher pressures on prices. This is what makes commodities a great hedge against inflation.
Today there is a shortage of NG and NGLs across the globe. The U.S. enjoys the position of being a leading producer in NG and NGLs, which should prevent some of the more severe problems that might be experienced overseas. It also means that domestic NG prices have pulled back. Yet the price today only looks cheap relative to recent prices. NG is having its best year since 2014.
It is a great time to be an NG/NGL producer, as they have sold off from their October highs. AR is taking advantage of this opportunity to expand and improve its balance sheet. Antero expects that it will be leveraged at only 1.0x EBITDA by the end of 2022 thanks to the high demand for natural gas.
AM will grow right along with AR, as a supplier of transportation and storage. We can collect our dividend, knowing that AM's customer is getting financially stronger and that future expansion is on the way.
Meanwhile, AM has improved its balance sheet and has enough free cash flow to fully fund its capital expenditures and dividend. AM is growing without taking on any new debt or issuing new equity! Furthermore, AM provides a natural hedge against inflation. Some more good news, AM unlike most midstream companies, is a corporation rather than a limited partnership and issues a 1099, no K-1 to worry about!
Antero Midstream has excellent dividend coverage and is exposed to sectors that are in secular growth where demand is rapidly rising. We can enjoy high levels of immediate income to fund our retirement paychecks without having to sell off our shares.
The beauty of income investing is the sooner you get on it, the more time you have to compound your dividend income stream. Einstein called compound interest the 8th wonder of the world and the most powerful force in the universe. We do not compound interest, but dividends. These strong dividends can be part of the backbone of a retirement portfolio.
