High-Yield Stocks for Dividend Investing: Linn Energy LLC

Source: LINN Energy LLC

LINN Energy LLC is an income investor's dream come true. Not only is LINN Energy a high-yield stock -- its current yield is north of 10% -- but that yield is relatively safe and growing safer by the day. Let's drill down a bit deeper to see why this company makes a solid choice for dividend investors.

LINN Energy 101
LINN Energy is an upstream oil and gas producer with a twist. Like most oil and gas companies, LINN Energy owns and operates oil and gas wells around the U.S. As the following slide notes, LINN Energy owns 26,000 oil and gas wells that are producing about 1.25 billion cubic feet of natural gas equivalent every single day, which incidentally is enough to meet the energy needs of 13,000 American households for a full year.

Source: LINN Energy LLC 

However, where LINN Energy differs from the typical oil and gas producer is in how it's structured. While most exploration and production companies are structured as a tax-paying C corporation, LINN Energy is structured as a tax-advantaged master limited partnership. That tax advantage means LINN Energy doesn't pay any taxes at the corporate level and instead passes through all of its income to unit holders.

The other area where LINN Energy is different is how it really doesn't invest very much of its income into riskier oil and gas exploration. Instead, it buys mature oil and gas wells and simply turns these wells into income machines. It's this unique business model that is the reason why LINN Energy's yield is more than double the yield of other oil and gas companies.

Drilling down into the numbers
Thanks to this business model LINN Energy has paid a quarterly distribution to its investors every single quarter since going public in 2006. Even better, the company recently switched to monthly distributions so investors get paid even more frequently. Most years LINN Energy has actually been able to grow its payout, though in tough times the company has at least been able to maintain a stable payout as we see on the following slide.

Source: LINN Energy LLC Investor Presentation 

The reason LINN Energy has been able to provide its investors with a stable distribution is because the company has focused on maintaining a strong distribution coverage ratio. This ratio measures the amount of cash flow the company pays out to its investors. A coverage ratio below 1.0 means the company is paying out more than 100% of its available cash flow to investors.

Over the past two years LINN Energy's coverage ratio has slipped to as low as 0.88 times while also being as high as 1.39 times. However, on average the ratio has been 1.07 times as the company has typically ended each quarter with about $11 million in excess cash flow. That's a solid ratio for maintaining its distribution, but the company is seeking a consistent ratio above 1.10 times to give it the confidence to raise its distribution again.

That higher coverage ratio, however, could soon be a reality as LINN Energy spent much of 2014 focused on improving its portfolio. The company sold or traded away assets that had production that was harder to maintain while replacing those assets with easier to maintain production. Because of this the company's coverage ratio is expected to improve to 1.17 times in 2015. That's doesn't even include any accretive acquisitions the company might make over the next year. Needless to say, LINN Energy's high yield is very safe and has the potential to grow as the company acquires additional assets. 

LINN Energy offers dividend seeking investors a very compelling current yield of more than 10%. That yield is rock solid and could be boosted in 2015 after the company spent the past two years ensuring that yield was on solid ground. Add it all up and LINN Energy is a top high-yield stock for dividend investing.

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The article High-Yield Stocks for Dividend Investing: Linn Energy LLC originally appeared on Fool.com.

Matt DiLallo owns shares of Linn Energy, LLC. 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.

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