JUNE 2014, VOL. 3, NO. 6
Investing for Income
Strategies to Boost Your Cash Yield
And the Dividends, They Just Keep Rolling Along
I
n 2013, 418 members of
Standard & Poor’s 500-stock
index paid $331 billion in cash
dividends, the second-highest
amount ever and the fifth straight
year this bounty exceeded $300
billion. Through mid May, S&P
500 companies have paid out
$144 billion, so 2014 is sure to
add a year to the $300-billion-plus
run. The average yield for S&P
500 dividend-payers is 2.1%.
Better yet for cash-chasers,
last year’s $331 billion was 31.6%
of the 418 firms’ earnings, the
highest non-recession ratio of
S&P 500 dividends to profits
since 2004. This trend is thanks
in part to technology companies
sharing their colossal cash balances. After disbursing zero until
August 2012, Apple passed out
28.7% of its earnings in 2013.
The iPhone maker trails only
ExxonMobil in total dividends,
but just barely so. Last year,
Apple and Exxon each paid out
just under $11 billion. After recent
dividend hikes of 7.9% by Apple
and 9.5% by Exxon, both will
approach $12 billion this year.
Apple’s transformation from
Fort Knox to ATM is not unique.
Cisco Systems paid no dividends
until 2010 but now issues $3.6 billion a year, or 44% of its earnings.
UnitedHealth Group paid a slim
$36 million in 2009. Now it pays
$1.1 billion, and more will flow
because that’s only 20% of its net
income. There are similar stories
in every stock sector, and among
small and midsize companies, too.
Looking ahead, though, is it
likely that big business will tire
of paying richer dividends and
After disbursing zero until
2012, Apple passed out
29% of its earnings as
dividends in 2013.
find something else to do with its
mountains of cash? One possibility is bigger takeovers. Electric
utility Exelon, for example, is
buying Potomac Electric (Pepco)
for $6.8 billion, all in cash.
AT&T’s intended buyout of
DirecTV includes $15 billion in
cash as well as stock, and Pfizer
was willing to include at least
$40 billion in cash when it tried
to swallow AstraZeneca.
Inside This Issue...
Or executives could reason
that their campaign to recapture
stockholder confidence with cash
after the crash of 2008 has succeeded. They could taper 10%
increases to 5% without triggering
complaints or undermining share
prices. Scores of firms are already
dividend “aristocrats,” “achievers”
and “champions.” Unless they cut
or freeze dividends, they’ll retain
these laurels, which keep their
shares in dividend-focused funds
and ETFs.
We asked Don Taylor, manager of Franklin Rising Dividend
fund since 1996, if he thinks the
cash spigot will stay wide open.
He is confident that it will. “The
factors that have been the catalysts
for double-digit dividend increases are still in place,” he says.
These include entrenched low
interest rates and the strong price
gains in high-dividend stocks.
Wall Street strategists
continued on next page ...
Unless otherwise noted, prices and data are as of May 16, 2014
The Magic of Triple-Net Leases
3
These REITs generate spectacular longterm returns and pay predictable dividends.
And the category is expanding rapidly.
Timely Tactic of the Month
3
Two of our favorite managers collaborate
on a creative fund that’s yielding 7%.
The Green Swans, Flight Two
4
Last year we sought out financially strong
stocks that combine high dividends with
stable prices. The results are impressive.
Kiplinger’s 25 for Income
Energy and real estate set a fast pace in
yet another productive month.
5
Ask Jeff
6
Questions about tax-free bonds in a small
state, when to sell a winning fund, preferred
stocks, and a costly commodities partnership.
What’s New in Cash
7
Bill Gross splits from the bond bears, some
CD yields edge up, and Standard & Poor’s
pays closer attention to MLPs.
Rates and Yields
7
Model Portfolio: Going for the Max
8
Two losers offset strong performance from
our winners. So it’s time to winnow this
collection of top-yielding stocks and funds.
Copyright 2014 • The Kiplinger Washington Editors, Inc. • 1100 13th Street, NW • Washington, DC 20005-4051 • www.kiplingerincome.com
Kiplinger’s Investing for Income: Strategies to Boost Your Cash Yield
2
June 2014
... continued from previous page
still regard buying back stock
as an alternative to issuing dividends as a way to return cash to
the shareholders. But that trick
is intended to revive a flat or
falling stock price, not add fuel
to a rally. “I think payout ratios
are going to keep creeping up,”
Taylor predicts. The 31.6% ratio
for the S&P 500 today had been
40% in 2002. If the index revisits
that level, $100 billion more will
hit investors’ pockets.
Some strategists argue
against putting too much stock
in dividends. Seth Masters, chief
investment officer of Bernstein
Global Wealth Management,
sees much froth in high-yielding
areas such as utilities, and he
doubts that focusing on stocks
with high yields will protect
against the next correction. He
believes financial services and
media and entertainment are
the best buys today; except for
some insurance companies,
these aren’t big cash-payers.
EDITOR IN CHIEF AND PUBLISHER
Knight A. Kiplinger
EDITOR: Jeffrey R. Kosnett
RESEARCH: Marc A. Wojno
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Copyright © 2014 by The Kiplinger Washington Editors Inc.,
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Kiplinger’s Investing for Income is carefully
checked financial journalism; it is not personalized counsel on investing, taxes and law. We
suggest that you consult with qualified professionals in those fields for advice tailored to your
individual needs.
Dividends Hold the Fort
For 2014, however, the performance edge goes to the robust-yield
crowd, and not just because of the
success of utilities and real estate
investment trusts.
The Dow Jones Select Dividend index—100 high-yielding
stocks filtered for high dividendgrowth rates—had a total return
of 4.8% through May 16, compared with 1.7% for the Dow Jones
Total Stock Market index. You can
track the Select index by investing in iShares Select Dividend
ETF (symbol DVY). The Dogs of
the Dow, the ten highest-yielding
stocks of the 30 industrials, have
returned 3.5% so far this year,
nearly a percentage point ahead
of the full Dow (also including
dividends). An interesting ETF
called ALPS Sector Dividend Dogs
(SDOG), which applies the Dogs
of the Dow methodology equally
across ten stock sectors within the
S&P 500, has returned 6.1% to
date in 2014. Normally, we dismiss
ETF contrivances. But since ALPS
introduced the Sector Dogs ETF
in June 2012, it has both outgained
and outyielded DVY, producing
a 3.5% yield compared with 3.3%
for the iShares entry. Sector Dogs
returned 34.3% last year, so this
plan is capable of running with the
bulls as well as supplying income;
DVY returned 28.7% in 2013.
There are many smart dividend
strategies besides reaching for the
highest yields. Several of these are
in the money this year, while the
overall market is resting after last
year’s sprint.
One of our favorite methods
is our very own BHCG, or buy,
hold, collect and grow. This strategy involves investing in growth
companies that have a history of
raising dividends sharply and the
wherewithal to do so for years to
come. As you hold—or add more
shares on dips—the cumulative
dividend growth gives you a high
yield based on the dollars you
originally paid for the shares.
We asked FactSet Research
(www.factset.com), an analytical
market-data firm, to sort the S&P
500 by fastest compound growth
rate in payout ratios over varying
periods. The dividend boom is
about five years old, so we sought
the 20 stocks with the sharpest
upward five-year trajectories in
payout ratio. These companies are
fervent believers in piling on the
dividends. We made one fudge:
We skipped three mining stocks
because that up-and-down (and
currently down-and-out) industry
will struggle to sustain decent
dividends.
Last year, the group of 20
returned an average of 34.3%.
For 2014, 12 are in the green
and three—Exelon (EXC, price
$34.37, yield 3.6%), Harman
International (HAR, $105.50,
1.1%) and Helmerich & Payne
(HP, $104.57, 2.4%)—are up
30%. Century Link (CTL,
$38.18, 5.7%) and Corning
(GLW, $20.95, 1.9%) have
returns near 20%. In this sputtering
market, that is super.
We turned to the leaders in
five-year dividend growth, and the
trend is the same: great last year
and fine so far in 2014. In July’s
letter, we’ll explore the results and
prospects for that group and others, such as the aristocrats (S&P
500 members with 25 straight
years of raises) and the champions (companies of all sizes with a
quarter-century or more of annual
boosts). If you like dividends,
whether you cash the checks
or reinvest, don’t go away.
Copyright 2014 • The Kiplinger Washington Editors, Inc. • 1100 13th Street, NW • Washington, DC 20005-4051 • www.kiplingerincome.com
June 2014
Kiplinger’s Investing for Income: Strategies to Boost Your Cash Yield
3
The Magic of Triple-Net Leases
S
aturday in the U.S.A.: You grab drive-through
coffee before your 8 A.M. workout, fill a
prescription, get your car’s oil changed and
meet a friend for lunch. As you zip around, you
aren’t thinking about who owns the bricks and
mortar or how you might claim a piece of the action.
But maybe you should be. All of the establishments you visited may be renting their space from
a particular kind of real estate investment trust
known as a triple-net-lease, or freestanding, REIT.
Since the 1980s, this style of REIT has shone
among all income-and-growth investments. Yields
rarely dip below 4%, and the total returns of such
aces as Kiplinger Income 25 member Realty
Income (symbol O, price $44, yield 5.0%) and
National Retail Properties (NNN, $35, 4.6%)
are awesome. Realty Income’s annualized return
is 17.2% since its initial public offering in 1994;
National Retail has returned 16.0% a year since it
began in 1990. Both stalled in 2013’s REIT slump
but are up sharply in 2014.
These trusts are as much bankers as landlords.
They collaborate with national chains to finance and
construct purpose-built premises (think of cookiecutter CVS and Walgreens stores). Tenants sign 15- to
20-year leases that obligate occupants to pay property
taxes, insurance and maintenance—hence the name
“triple net lease,” because the tenant, not the owner,
is responsible for those costs. Rents rise 1% to 2% a
year. Interest rates and inflation are immaterial. When
the REIT pays a higher rate to borrow, or if the land is
expensive, the added costs go into the lease.
These conditions suggest the arrangement is
so stacked in the REITs’ favor that the tenants will
rebel. Instead, retailers are willing partners. Why?
Simple, says Kevin Habicht, chief financial officer
of National Retail Properties, third in the category
with 1,903 properties in 47 states: “They tend to not
want to move once customers are used to the location, and that’s good for us.”
This formula also capitalizes on urban sprawl and
the homogenization of America’s consumer economy.
As Regal theatres, Dollar General stores, Jiffy Lubes,
LA Fitness gyms, and chain convenience stores and
restaurants overpower local merchants, this chain-storeREIT complex expands at warp speed. Lengthy leases
keep occupancy rates around 98%, compared with 85%
for strip centers and indoor malls.
The risk (remote so far) is if a REIT loses focus.
Realty Income turned heads when it bought a $269
million Napa Valley vineyard in 2010. Wine is a
fickle business. But Realty Income has a lease until
2030 with Diageo, one of the world’s biggest liquor
companies, and the vineyard is also just one of 4,200
holdings in 49 states and Puerto Rico. But you wouldn’t
want a REIT to go too far afield.
Realty Income and National Retail have earned
our confidence. The prognosis is cloudier for American Realty Capital Properties (ARCP, $13, 7.6%).
This REIT is an amalgam of a half-dozen public
and private REITs and ex-GE Capital properties. Its
locations—more than 3,000 in 49 states and Puerto
Rico—are fine and the yield is high. But, in contrast
with its older rivals, American Realty’s operating
income doesn’t nearly cover its annual dividend
(currently $1 a share). American Realty pulls much
of its payout from other financings, such as various
lines of credit. That’s a shaky situation, and it could
explain why its share-price increases badly lag those
of Realty Income, National Retail and REITs overall.
The first quarter of 2014 was encouraging, though,
so if American Realty cuts its debt, it might work out.
There are net-lease REITs outside of retail.
Lexington Realty Trust (LXP, $11, 5.9%) owns
220 single-tenant buildings in 41 states. It has a few
supermarkets and Kmarts, but mostly it has warehouses, medical clinics and for-profit colleges. It is
hard to evaluate and looks tough to manage, but since
its launch in 1993, its annualized total return is 11.1%.
We can’t say triple-nets are a sure thing, but they sure
are shareholder-friendly.
Timely Tactic of the Month
We regularly extol DoubleLine for its low costs, high returns and
deep team of managers who often reward investors by defying Wall
Street’s orthodoxy. So we’re pleased to welcome DoubleLine Flexible
Income (symbol DLINX). Launched in April, the fund empowers
the crew from L.A. to invest however it likes. But we suggest that
you give it six months to break in. In the meantime, RiverNorth
DoubleLine Strategic Income (RNDLX) is clicking, with a return
of 6.7% so far this year (8.9% annualized since its inception in
2010) and a current yield of 7.1%. RiverNorth invests half of assets
in closed-end funds; the other half is an open canvas for DoubleLine.
Copyright 2014 • The Kiplinger Washington Editors, Inc. • 1100 13th Street, NW • Washington, DC 20005-4051 • www.kiplingerincome.com
4
Kiplinger’s Investing for Income: Strategies to Boost Your Cash Yield
June 2014
The Green Swans, Flight Two
I
n the April 2013 letter, we
identified ten stocks with
dividend yields of 2% or
better and other calming features,
such as minimal long-term debt
and a stable share-price history.
We chose companies whose
prices are among the most stable
15% of all stocks, as measured by
Value Line, and whose price
charts aren’t littered by a pattern
of one-day plunges of 10% or
more that so unnerve shareholders of companies that issue
negative news.
Our Green Swans—a name
that’s a play on “sleep well at
night” and “black swan,” a term
for a surprise disaster—have
performed well. The Swans’ total
returns from March 15, 2013 (the
date of the prices in the April
2013 letter) through May 16 this
year range from a high of 62.7%
for Walgreen (symbol WAG)
to a low of 7.6% for Accenture
(ACN). Six of the ten returned
20% or more, while the total
return of Standard & Poor’s
500-stock index for the same interval was 23.3%. Because Green
Swans have a proven record of
relative safety, even a tie or slight
discount to the broad indexes
count as a win.
After Walgreen, the next
five largest total returns are
Illinois Tool Works (ITW,
41.4%), WD-40 (WDFC,
37.6%), 3M (MMM, 35.7%),
Automatic Data Processing
(ADP, 23.7%) and Lancaster
Colony (LANC, 23.7%). The
other three stocks, Coca-Cola,
Sysco and Tim Hortons, returned between 8.4% and 12.5%.
We know the stock market
can be illogical, but in this side-
ways period, with the indexes
stymied by headlines about
weak sales and earnings growth,
this stock-selection method has
merit. So we updated the original screen to see if we should
expand the flock or replace any
of the choices.
Accenture gets the boot
because it has become a more unpredictable investment as the company’s revenues and profits have
Over 14 months, the
total return of our Green
Swans has ranged from
8% to as high as 63%.
missed analysts’ estimates several
times. So while the company is
nearly debt-free and a vigorous
dividend-raiser, it’s lost its status
as one of the lowest-stress stocks.
Our replacement is Paychex
(PAYX), which competes head-on
with ADP and has traced virtually
the identical share-price chart over
the past three years. Paychex has
no long-term debt, yields 3.4%
and ranks near the top of Value
Line’s filters for price stability and
earnings predictability. The worst
we can say is that by adding Paychex, one-fifth of the Swans depend on the fortunes of employers
that outsource payroll administration. If that concerns you, consider
instead Colgate-Palmolive (CL)
or General Dynamics (GD). Both
are up nicely since last spring, pay
good and rising dividends, pass all
balance-sheet and stability tests,
and are easy to understand.
Introducing the Cygnets
Swans are mostly giant companies
with a commanding competitive position. Some are half of an
industry’s dominant duo, such
as Walgreen (versus CVS) and
Coca-Cola (versus Pepsi). Or, with
ADP and Paychex, you have both
parts of the tandem. Target and
Wal-Mart would be another pair
but have too much long-term debt
to be Swans. Debt narrowly leaves
out Pepsi, though sometimes it is
a better investment than Coke.
For variety, we applied
the same criteria to all small
and medium-size companies
(maximum total market value $5
billion) with dividend yields of
2% and up. These are the Green
Cygnets (cygnet is the term for a
young swan).
The Cygnets include gas, water and electric utilities, which we
continue to recommend enthusiastically for safety, income and a little growth. However, the Swans’
place in your portfolio is first for
growth, with the rising dividend a
bonus and a source of stability. An
ideal Cygnet takes after Coke, 3M
or General Dynamics, but rules
over a smaller industry or product
line. Lancaster Colony, a force
in frozen baked goods, is actually a Cygnet. So is WD-40. Our
filter also found Flowers Foods
(FLO, $21.41, 2.1%), a close
competitor of Lancaster Colony;
Hillenbrand (HI, $29.41, 2.7%),
a maker of caskets and funeral
supplies; dental-products supplier
Patterson Companies (PDCO,
$41.13, 1.9%); and several specialized insurers, including Erie
Indemnity (ERIE, $76.30. 3.3%)
and Hanover Insurance Group
(THG, $59.20, 2.5%).
Copyright 2014 • The Kiplinger Washington Editors, Inc. • 1100 13th Street, NW • Washington, DC 20005-4051 • www.kiplingerincome.com
Kiplinger’s Investing for Income: Strategies to Boost Your Cash Yield
June 2014
25
for Income
L
ookin’ good. High-yield stuff had fun last month as interest rates
eased and ordinary stocks had a few sour days. That combination
bolsters bonds and steers other money to high-dividend selections
in energy, infrastructure, real estate and utilities. Over the past month, BP
Prudhoe Bay and Suburban Propane led the 25 with gains of 7.1% and 7.2%,
respectively. The cost of propane is near a record, and the Alaskan oil trust’s
shares passed $90 for the first time in almost a year as a big April dividend
hike brought out the investors. REITs and utilities extended their recovery.
National Grid gained 5.8%; Health Care REIT, 5.3%; Realty Income, 4.8%;
NTT DoCoMo, 4.6%; and Annaly Capital Management, 3.9%. Our closedend bond funds did well. Pimco Corporate & Income Strategy added 5.1%,
helped by a big slug of California municipal bonds—a rare but inspired
choice for a taxable fund that’s free to invest in almost anything. Nuveen
Municipal Value rose 3.6%. The rest of the 25 broke even (a price change
of less than 1% either way) or gained between 1% and 2%.
Utility stocks
American Electric Power (AEP)
5
Price
Traditional electric company serving 11 eastern and southern states
$52.70
Yield
Frequency
3.8%
quarterly
AT&T (T)
Wireless service giant that grew out of the former SBC
36.74
5.0
quarterly
National Grid (NGG)
British national gas and electric utility that also operates in New York and New England
73.57
4.3
semiannually
NTT DoCoMo (DCM)
Major Japanese wireless company with 4G service
16.27
3.8
semiannually
4.9%
monthly
4.7
monthly
High-yielding open-end bond funds
Aberdeen Global High Income (BJBHX)
Intermediate-term corporate bonds from all over the world
DoubleLine Total Return (DLTNX)
Income fund that makes the most of mortgage securities
$10.82
11.01
Fidelity Capital & Income (FAGIX)
Creative and aggressive junk bond fund
10.12
4.3
monthly
Fidelity New Markets Income (FNMIX)
Relatively new but impressive emerging-markets bond fund
16.45
4.5
monthly
Loomis Sayles Bond (LSBRX)
Go-anywhere investment-grade bond fund that is currently cautious
15.61
3.3
monthly
Metropolitan West High Yield Bond (MWHYX)
Medium-size junk bond fund with high standards and excellent record
10.41
4.3
monthly
$14.79
8.1%
monthly
Closed-end mutual funds and ETFs
AllianceBernstein Global High Income (AWF)
High-yield corporate bonds and government bonds from emerging markets
DWS Municipal Income Trust (KTF)
A high-quality leveraged municipal fund for top tax-free income
iShares Standard & Poor’s U.S. Preferred Stock (PFF) ETF with hundreds of preferred stocks
13.39
6.3
monthly
39.65
5.8
monthly
Nuveen Municipal Value (NUV)
No leverage here, so less yield than the DWS fund but more safety
9.75
4.4
monthly
Pimco Corporate & Income Strategy (PCN)
An unusual mixture of high-yield corporate, muni and foreign bonds
17.00
7.9
monthly
Templeton Global Income Fund (GIM)
A combination of emerging markets and rich countries’ government bonds
7.93
3.8
monthly
10.3%
quarterly
Real Estate Investment Trusts
Annaly Capital Management (NLY)
Borrows cheaply to reinvest in government-guaranteed mortgage securities
$11.69
Government Properties Income Trust (GOV)
Big landlord to federal agencies, state governments and the United Nations
25.37
6.8
quarterly
Health Care REIT (HCN)
Develops and owns assisted-living homes, hospitals and medical labs
65.24
4.9
quarterly
Realty Income (O)
Landlord to chain stores and restaurants, also known for 525 straight monthly dividends
43.88
5.0
monthly
Energy-income funds and partnerships
BP Prudhoe Bay Royalty Trust (BPT)
Gets a share of revenue from Alaskan crude sales
$90.91
13.2%
quarterly
Brookfield Infrastructure Partners (BIP)*
Owns timberlands, toll highways, ports and transmission lines
40.37
4.8
quarterly
Plains All American Pipeline (PAA)*
Owns and operates fuel pipelines and storage facilities in the central U.S.
57.18
4.4
quarterly
Suburban Propane Partners (SPH)*
Nationwide supplier and distributor of LP gas and similar fuels
45.97
7.6
quarterly
Vanguard Natural Resources (VNR)*
Explores for and produces oil and gas all over the U.S.
30.55
8.2
monthly
Funds in italics pay tax-exempt income. Investments with an asterisk (*) are partnerships. Prices and yields as of May 16, 2014. SOURCES: Fund companies, Morningstar Inc., Yahoo.
Copyright 2014 • The Kiplinger Washington Editors, Inc. • 1100 13th Street, NW • Washington, DC 20005-4051 • www.kiplingerincome.com
Kiplinger’s Investing for Income: Strategies to Boost Your Cash Yield
Ask Jeff
Readers are invited to send questions about income investments
to jkosnett@kiplinger.com. I’ll answer you personally if there’s
no space here for a published reply.
Dear Jeff:
My wife and I moved from California to Idaho and want to invest
$100,000 in Idaho bonds. My
broker, however, has been unable
to turn up any medium-duration
bonds. Any suggestions?
Steve
Dear Steve:
Idaho and its localities have good
credit. But the state rarely borrows, and residents are known
to nix local school bonds. On a
given day, fewer than 100 Idaho
bonds change hands, compared
with 5,000 to 8,000 in California.
The few trades almost all settle at
big premiums over par, so your
broker is apparently understandably chary of the high prices in
this small, illiquid market. Only
one small mutual fund focuses on
Idaho bonds. I suggest parking the
$100,000 in a national muni fund,
or leave it in California bonds and
pay Idaho tax (top rate 7.4%) on
the income.
Dear Jeff:
I bought closed-end PFD, your
Timely Tactic in December, at
$12.32. It has risen to $14.59. Is it
time to sell to lock in the profit?
Cliveous
Dear Cliveous:
When to sell is never obvious, and
with closed-end funds the decision is complicated by revolving
discounts and premiums. PFD is
Flaherty & Crumrine Preferred Income, a leveraged fund of preferred
stocks. So far in 2014, it has a total
return of 22.9%. More than half of
that is because PFD’s share price
rallied from a discount to net asset
value to a 6.5% premium. If you
consider only the actual portfolio,
which you can measure by total
return on NAV, the partial year
return is 9.7%. That’s more than
satisfactory. But the temporary discount from NAV is what signaled
us to call PFD timely and attracted
others to buy this well-managed
array of preferreds on the cheap. If
you exit now, you’ll owe ordinary
income taxes on the gain (unless
it’s in an IRA) and say goodbye to
the 8.7% dividend on your original price. Holding seems a better
idea. Preferred stocks are sound
and popular, so there’s no reason
to think the premium will vanish
soon. PFD sold for a 22% premium
to NAV in late 2011 and early
2012. If it returns to that extreme,
you have an easy decision to sell.
Dear Jeff:
I believe my portfolio is overweighted in stocks, at 65%. As I
reallocate, how should I categorize
preferred stocks?
Frank
Dear Frank:
Although preferreds have stock in
the name, I would count them as
June 2014
bonds. The fixed payments,
the fact that the shares can be
called, and the close linkage
between share prices and interestrate action all make preferreds
more akin to bonds than stocks.
Dear Jeff:
At the end of 2010, my adviser
invested 5% of my account in
Altegris QIM, a commodities partnership. I have a loss to date, and I
don’t like the expenses, which include general partner fees, service
fees, miscellaneous fees and 2%
in sales commissions on top of the
1% I pay the adviser to manage
my portfolio. He says the partnership is doing poorly because we’ve
had a straight-up bull market, and
he promises it will prosper when
“stocks get rocky.” Is this investment valuable for diversification?
And if so, can I find a lower-cost
alternative?
Bill
Dear Bill:
None of the partnership’s high
fees and expenses is more annoying than the perpetual 2% tribute
(0.167% a month) to the salesman, who is already taking a cut
of your portfolio. Also, Altegris’s
annual report lists one excuse after
another, quarter after quarter, for
QIM’s dismal performance. Amazingly, the fund even frittered away
money last year selling oil futures
short, only to see crude run up past
$100 a barrel. Even if Altegris’s
managers could guess the direction
of commodity markets, the design
of this investment is a ball and
chain. You can own futures of copper, coffee, oil, corn, gold and so
forth in low-cost ETFs. I think you
should always have oil and gas for
diversification. But not here.
Copyright 2014 • The Kiplinger Washington Editors, Inc. • 1100 13th Street, NW • Washington, DC 20005-4051 • www.kiplingerincome.com
Lise Metzger
6
June 2014
Kiplinger’s Investing for Income: Strategies to Boost Your Cash Yield
What’s New in Cash
Bill Gross’s about-face. The bond guru and boss
of the Pimco Total Return mutual fund and ETF just
resigned from the society of bond bears and interestrate fearmongers. At a Pimco roundtable in May,
Gross prophesied that the next five years would be
a “new neutral,” with flattish rates and steady 3% to
5% bond returns. Three years ago this month, Gross
lustily but erroneously promised a big crowd at a
Morningstar financial conference in Chicago that
bond investors would be “cooked like frogs in an
increasingly hot pot of hot water.” Instead, bonds
are flourishing and the Total Return fund (symbol
PTTAX) and its legion of shareholders got cooked.
The longtime high-flying fund fell to the lowest
10% of intermediate-term bond funds over the past
12 months and hauled in a total return that’s well
below average for its category since 2011. Gross is
due to get an outlook correct sometime and redeem
the $230 billion mutual fund’s flagging results. Still,
hold off for proof of improvement—unless Total
Return is the only bond fund in your 401(k) and
you need it for diversification.
Better rates on CDs…after a fashion. The one
place where interest rates are up enough to soothe
savers a bit is when you look between two and
seven years out. This is the area bond people call
“the belly” of the rate curve. Most of these yields
are about a half-percentage point higher than a year
ago, and that’s nudging certificate of deposit yields
up. You can find as much as 2.31% for five years at
VirtualBank (see the table on this page). That’s not
thrilling, to be sure, but it will deliver more cash for
your core.
S&P to rate MLPs. More evidence that master
limited partnerships have entered the mainstream:
Standard & Poor’s plans to apply stress tests and
issue credit ratings on these ever-more-popular oiland-gas income investments. S&P intends to zero in
on the riskiness of the partnerships’ balance sheets,
whether or not they have secured favorable terms for
borrowing, and potential threats to current and future
cash distributions. The ratings firm will take a few
months to develop its specific criteria, but the deeper
analysis is welcome.
7
RATES AND YIELDS
MONEY MARKET FUNDS
Taxable
Yield
Phone Number
Davis Govt. Money Market Fund A*
0.11%
800-279-0279
Meeder Money Market Fund Retail*
0.06
800-325-3539
Category Average
0.01%
Tax-Free
Yield
Phone Number
Alpine Municipal Money Fund Inv*
0.04
888-785-5578
PNC Tax-Exempt MMF A*
0.02
800-662-3863
Category Average
0.01%
*Fund is waiving all or a portion of its expenses. The 30-day simple yields are to May 5.
SOURCE: Money Fund Report
BENCHMARKS
Year Ago
3 Months Ago
This Month
Inflation rate†
1.10%
1.60%
2.00%
Six-month Treasury
0.08
0.07
0.05
One-year Treasury (CMT)**
0.12
0.11
0.09
Ten-year Treasury (CMT)**
1.87
2.75
2.52
†Year-to-year change in CPI
as of April 2013, January 2014 and April 2014.
**Constant Maturity Treasury yield.
CERTIFICATES OF DEPOSIT
Six Months
Yield
Phone Number
Zions Bank (Utah)
1.00%
800-524-8875
Doral Bank (Fla.)
0.87
855-513-6725
National Average
0.14%
One Year
Yield
Phone Number
EverBank (Fla.)
1.07%
866-242-1924
VirtualBank (Fla.)
1.07
877-998-2265
National Average
0.24%
Five Years
Yield
Phone Number
VirtualBank (Fla.)
2.31%
877-998-2265
GE Capital Retail Bank (N.J.)
2.30
800-903-8154
National Average
0.80%
Yields include compounding and are as of May 13. For information on deposit insurance, go to the Web site of
the Federal Deposit Insurance Corp. (www.fdic.gov). SOURCE: Bankrate.com
FIXED ANNUITIES
Single-Premium Immediate-Annuity Monthly Payout Factor
Male age 65
Highest
Average
$588
$559
Female age 65
544
523
Male age 70
678
639
Female age 70
614
592
Payouts are guaranteed to the annuitant for life, with a minimum payout period of ten years. Payout factors
are per each $100,000. SOURCE: Comparative Annuity Reports (www.comparativeannuityreports.com).
Annuity data are to May 2014.
Copyright 2014 • The Kiplinger Washington Editors, Inc. • 1100 13th Street, NW • Washington, DC 20005-4051 • www.kiplingerincome.com
8
Kiplinger’s Investing for Income: Strategies to Boost Your Cash Yield
June 2014
Model Portfolio: Going for the Max
T
wo of Max’s ten selections struggled so
mightily over the past four months that
they negated otherwise splendid results.
So we’ve decided that having eight high-performing high-payers beats insisting on an even ten.
The total results were still decent, with a positive
2.3% return since our review in February’s letter.
We’ll explain the two deletions below. But first,
the good news: The income stream kept flowing.
Our $100,000 spread among the ten investments
distributed $2,627 of interest and dividends over
the four months, for an annualized yield of 7.9%.
It would have been more, except that our four-month
cycles produce some quirky numbers when payment
dates fall outside our measurement period.
In all, Max’s total market value ended almost
unchanged, at $99,644, from January 17 through
May 16, after putting that $2,600-plus into investors’
hands. Seven of the ten gained in price, topped by an
11.2% rise in Annaly and 8% gains by Global X Super Dividend and SPDR S&P International Dividend.
However, we must address the two painful price
drops: 24% for farmland REIT Gladstone Land and
12% for business-development company Prospect
Capital. Gladstone Land’s dividend cut finally shook
the stock. And although Gladstone’s business idea
is sensible, a 36-cent-a-year payout on an $11 stock
isn’t enough. We would like to include a property
REIT in the Max portfolio, but none yields as much
as 7%. Our dividend ETFs do hold some real estate,
and Annaly, a mortgage-trading REIT, is also stepping gingerly into property ownership with a small
collection of triple-net leases.
Prospect is a long-term success, and in the
rough-and-tumble world of small-business finance
and lending for takeovers and real estate deals, a 12%
loss isn’t necessarily dire or even rare. However,
Prospect’s stock fell hard in one gulp early in May
after it disclosed a Securities and Exchange Commission investigation into its accounting practices. The
issue is arcane, and the outcome isn’t clear. Still, the
news is discomfiting. On top of that, Prospect has issued 48 million new common shares this year, which
diluted its stock by 18%, and the three offerings were
all at higher prices than the BDC’s latest net asset
value of $9.87 a share. You could take a chance on
the shares now, but because the healthier and undiluted
Ares Capital is on the list, we’ll remove Prospect until
the investigation is resolved.
The rest of Max is fine. Seven of the other eight
selections gained between January 17 and May 16,
with Ares down 6%. So we are comfortable starting this measurement period with $100,000 spread
across the eight survivors, in equal slices of $12,500,
while we search for other opportunities. High-yield
bonds, energy stocks and dividend funds are all well
positioned given the continued backdrop of low and
stable interest rates and fair economic growth. Annaly
pledges to hold its quarterly dividend at 30 cents.
Aberdeen Global High Income (symbol
BJBHX, $10.82, current yield 4.9%, one-year total
return to May 16, 7.2%) holds high-yield corporate
bonds and bank loans.
Annaly Capital Management (NLY, $11.69,
yield 10.3%, total return –12.6%). Annaly is a REIT
that prospers from low short-term rates on debt it
uses to invest in government-guaranteed mortgages.
Ares Capital (ARES, $16.88, yield 9.0%, total
return 2.7%). This business development company
lends to emerging businesses and also benefits from
a low cost of funds.
Global X Super Dividend ETF (SDIV, $25.17,
yield 5.7%, total return 13.0%) invests in about 100
of the highest-yielding solid small and midsize firms
in the U.S. and overseas.
SPDR S&P International Dividend ETF
(DWX, $50.75, yield 2.7%, total return 9.0%) complements Global X by investing in 100 of the largest
foreign companies known for paying high dividends.
Suburban Propane Partners (SPH, $45.97,
yield 7.6%, total return 3.1%) distributes propane and
other liquid fuels.
Vanguard Natural Resources LLC (VNR,
$30.55, yield 8.2%, total return 13.0%) is an oil-andgas production company structured as a partnership
to limit taxes.
USAA High Income Fund (USHYX, $8.96,
yield 6.0%, total return 6.7%) is a domestic junkbond fund that eschews wild risks.
Copyright 2014 • The Kiplinger Washington Editors, Inc. • 1100 13th Street, NW • Washington, DC 20005-4051 • www.kiplingerincome.com