The Weekend Press Looks for Yield

Barron’s ran an interesting article on places to go for higher income than high-grade bonds. The writer pointed out quite accurately that ten-year treasury bonds do not provide sufficient income to preserve after-tax real purchasing power. The Federal government doesn’t believe its creditors should earn a real return, and has adopted a policy to prevent that. The thinking investor’s response is to look elsewhere and to keep more money in cash waiting for better opportunities.

Closed end funds, which Barron’s highlights in their article “How to Get Safe Annual Payouts of 7%”  can be interesting if they trade at a discount. However, much of the market is characterized by funds that pay distributions in excess of their earnings in order to maintain a high “distribution yield”, even though they are in part giving investors back their own money. Closed end funds are best owned if they’re mispriced, in combination with a hedge to neutralize the NAV movements. We have owned Boulder Total Return Fund (BTF) for some time. The fund has a substantial holding in Berkshire Hathaway (BRK), and its second biggest holding is Yum Brands (YUM). BTF doesn’t pay a distribution, an omission that has caused traditional closed end fund investors to shun the stock. Consequently, it trades at a 21% discount to NAV. The PM and affiliates own over a third of the shares. One day they may reinstate the distribution or engage is some other value-creating exercise. In the meantime, it represents attractively-priced exposure to BRK or can be hedged to focus on the discount narrowing.

Another area we like is Master Limited Parterships.  Six per cent tax-deferred distributions with a reasonable expectation of 4-5% distribution growth. MLPs have historically outperformed stocks, bonds and REITS but remain an under-invested asset class. K-1’s deter many potential investors. But MLPs, particularly the midstream firms that invest in pipelines, storage facilities and refineries have only modest exposure to energy prices and toll-based fee models that create earnings stability. We think of MLPs as a good substitute for high yield bonds. Historically similar levels of price volatility but more attractive return profile.

Many high-dividend stocks are attractive. In some cases large companies with stable earnings growth offer dividends higher than their own debt. Johnson & Johnson (JNJ) and Pepsi (PEP) are both examples, and are names that we own in our Hedged Dividend Capture Strategy, where a diversified portfolio of such names is combined with an equity market hedge seeking to profit from dividends with reduced market volatility.

The “Fracturing of Pennsylvania” was another in a series the New York Times has been running on shale gas and potential environmental damage from its extraction. We like natural gas E&P names – shale gas represents an enormous source of fuel for the U.S. in the years ahead. It’s far cheaper than oil on a BTU-equivalent basis and it’s here in the politically stable U.S. But it needs to be mined safely. The issue of toxins leaking into drinking water remains a vexing one. So far the science strongly suggests that the risks are extremely low. But the number of stories of undrinkable water and high levels of metals in residents bloodstream is growing. The evidence that fracking is to blame is inconclusive at best, but it’s not an issue to ignore for investors or the landowners who sell drilling rights to their land. Range Resources (RRC) appears to have reacted professionally, which doesn’t shock me at all having met the management. We continue to like the company but believe the stock is expensive. We prefer Devon Energy (DVN), which trades closer to the value of its proven reserves.

The news from Europe remains a poker game. We are short the € through owning EUO. Kyle Bass has a thought provoking perspective.

Disclosure: Aithor is Long BTF, BRK, JNJ, PEP, EUO, DVN

Print Friendly, PDF & Email

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.

Print Friendly, PDF & Email
0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.