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Rattle and Hum

*** Official High Yield Investing Thread ***

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I've asked @Sand to be available for a high-yield investing thread; thankfully he has agreed. I know there are many others on the board who are also way more knowledgeable on this topic than I so I'm hopeful they will follow as well. Since we FBguys aren't getting younger, I thought the conversation my apply to a few of us. I believe a good benchmark for "high yield" is any investment where the income is targeted for 5%+ APY, investment time frame is six months or more, and growth is a secondary or a non factor. 

Two questions to consider:

1) Are yields increasing?     2) Are the dividend payouts covered by earnings? 

 

 

Edited by Rattle and Hum
Added specific mentions.
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so you talking stocks with a high dividend?  Royal Dutch Shell pays around 6% I think. 

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9 minutes ago, irishidiot said:

so you talking stocks with a high dividend?  Royal Dutch Shell pays around 6% I think. 

Absolutely.   Anything over about 5% is considered high yield.   That goes up to some stupid high yield,  like MORL at 19%.  

Items that generally fall into this bucket:

High yield C Corp (like RDS) 

REITs

BDCs 

MLPs

Junk bond funds

Baby bonds 

Preferred stocks 

CEFs

Each of these are their own beasts.  I'll try to come in with a decent overview later. 

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I bought RDS for the yield 6 months ago but the damn stock went up 40%.   No I'm not smart in these things, was just looking for a decent dividend & it fit the bill.

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2 hours ago, irishidiot said:

I bought RDS for the yield 6 months ago but the damn stock went up 40%.   No I'm not smart in these things, was just looking for a decent dividend & it fit the bill.

You poor MFer.  My condolences.

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Psec is just one BDC out of 40-50.  Yield is only one factor to consider when choosing one of these names- i would personally want to get very comfortable with any specific portfolio’s likely performance through a downturn before wading into this sector.

if you have access to it, start with Jonathan Bock’s BDC research, at Wells Fargo.  He has written extensively on PSEC lately.

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4 hours ago, elbowrm said:

Psec is just one BDC out of 40-50.  Yield is only one factor to consider when choosing one of these names- i would personally want to get very comfortable with any specific portfolio’s likely performance through a downturn before wading into this sector.

if you have access to it, start with Jonathan Bock’s BDC research, at Wells Fargo.  He has written extensively on PSEC lately.

Thanks. Looks like he has two shorts from 2016 on record. Any good sites that would help one easily compare financials with other BDCs?

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5 hours ago, elbowrm said:

Psec is just one BDC out of 40-50.  Yield is only one factor to consider when choosing one of these names- i would personally want to get very comfortable with any specific portfolio’s likely performance through a downturn before wading into this sector.

:yes:

Many of these lend out mezzanine debt and will be very exposed in a recession.  

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Tulip bulbs?

:blackdot:

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1 hour ago, Rattle and Hum said:

Thanks. Looks like he has two shorts from 2016 on record. Any good sites that would help one easily compare financials with other BDCs?

http://www.bdcs.com/#/

cliffwater is legit

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11 minutes ago, kevzilla said:

Can anyone point me to some introductory reading on CEFs? Thanks!

What are you looking for exactly Kevzilla?

I'm not necessarily endorsing these, but here is some interesting reading

https://contrarianoutlook.com/3-cefs-with-9-7-yields-and-20-upside/?utm_source=CONL012218&utm_medium=email&utm_campaign=CONL012218

 

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35 minutes ago, guru_007 said:

What are you looking for exactly Kevzilla?

I'm not necessarily endorsing these, but here is some interesting reading

https://contrarianoutlook.com/3-cefs-with-9-7-yields-and-20-upside/?utm_source=CONL012218&utm_medium=email&utm_campaign=CONL012218

 

This is the one I found:

https://finance.yahoo.com/m/bcb25da9-5033-3ebe-ab1b-8b2fc3785d01/4-tax-free-5%-dividends%3A-3-to.html

The question is, why are all these righteous dividend payers trading at a discount to their net asset value? I don't know what I don't know here, so it's hard to make a recommendation to my old man about what to with the almost 70% cash in his taxable account. He's 81, and I've always told him the right amount of cash is the amount that lets him sleep at night, but he is now coming to around to the idea that his money should be working a little harder than it is. Five percent tax-free sounds pretty good, to me, and probably would to him.

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5 minutes ago, kevzilla said:

This is the one I found:

https://finance.yahoo.com/m/bcb25da9-5033-3ebe-ab1b-8b2fc3785d01/4-tax-free-5%-dividends%3A-3-to.html

The question is, why are all these righteous dividend payers trading at a discount to their net asset value? I don't know what I don't know here, so it's hard to make a recommendation to my old man about what to with the almost 70% cash in his taxable account. He's 81, and I've always told him the right amount of cash is the amount that lets him sleep at night, but he is now coming to around to the idea that his money should be working a little harder than it is. Five percent tax-free sounds pretty good, to me, and probably would to him.

While these might be a good "play" these routinely have a 10% draw down. For your 81 year old father I would wonder if there is, maybe, a 4% option with less potential heartburn?

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13 minutes ago, Rattle and Hum said:

While these might be a good "play" these routinely have a 10% draw down. For your 81 year old father I would wonder if there is, maybe, a 4% option with less potential heartburn?

Why does it draw down? How long does it take to come back? His outlook is remarkably long-term. He intends leave most of his money behind, barring unforeseen medical problems. And he has an IRA just as big as his taxable account...fully invested in stocks. He's a real piece of work. :D

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2 hours ago, guru_007 said:

What are you looking for exactly Kevzilla?

I'm not necessarily endorsing these, but here is some interesting reading

https://contrarianoutlook.com/3-cefs-with-9-7-yields-and-20-upside/?utm_source=CONL012218&utm_medium=email&utm_campaign=CONL012218

 

How to analyze a CEF.

 

1 hour ago, kevzilla said:

This is the one I found:

https://finance.yahoo.com/m/bcb25da9-5033-3ebe-ab1b-8b2fc3785d01/4-tax-free-5%-dividends%3A-3-to.html

The question is, why are all these righteous dividend payers trading at a discount to their net asset value? I don't know what I don't know here, so it's hard to make a recommendation to my old man about what to with the almost 70% cash in his taxable account. He's 81, and I've always told him the right amount of cash is the amount that lets him sleep at night, but he is now coming to around to the idea that his money should be working a little harder than it is. Five percent tax-free sounds pretty good, to me, and probably would to him.

Certainly not all CEFs are at a discount (see: PHK).  The natural state of a CEF is a slight discount.  There is the cost of leverage in these, which does effectively drop NAV a bit.  

And, IMO, muni CEFs are the one area where CEFs make the most sense.  They're great vehicles for this type of security (though that doesn't mean they aren't without risk).

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4 minutes ago, kevzilla said:

TYVM Sand, I'll look at that link in the morning when I'm sober. :P

Studying drunk is much more fun.

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So as a start to this, a general primer.  Why invest in high yield?  One good reason is elucidated in this article.  That is a great math lesson on how high yield can fit into a portfolio - it juices the cash shed immediately over waiting (a while) for a high dividend growth portfolio to take over.  

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17 hours ago, Sand said:

:yes:

Many of these lend out mezzanine debt and will be very exposed in a recession.  

Are you avoiding these now for this reason @Sand @elbowrm? Seems like we might have a couple years to run as business climate is very good. According to BDCS.com that Elbow mentioned, PSEC trades at a 25% discount to NAV. PSEC's yield has fallen over the past six months. I'm sure that the higher interest rate environment will really lean on the highly-levered BDCs. Here is a nice snapshot from PSEC's website.

Technically, ARCC is a BDC with a much nicer base but trades at only a 1% discount to NAV and has a lower yield of 9% (not chicken scratch). It's also far less volatile than PSEC.

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You guys are speaking a foreign language to me. But I love learning this type of stuff.

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2 hours ago, Rattle and Hum said:

Are you avoiding these now for this reason @Sand @elbowrm?

I avoid them because I don't understand them adequately.  I own REITs, prefferreds, CEFs, and MLPs.  Just never got into these except very superficially.

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1 hour ago, EYLive said:

You guys are speaking a foreign language to me.

When are you starting *The Official Wombat Thread*?

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@Sand you recently rotated into VTR and O (REITs which have recently sold off. have yields above 5%, and have a history of increasing payouts). Could you walk us through your methodology for finding a list to consider and ultimately choosing your investments? 

- Why REITs at this time over the other seven categories?

- Any particular sites that are helpful?

- Do you use an alert/subscription service to generate ideas?

- Do you use FFO, a debt measure, payout ratios and/or other metrics for weeding out the potential laggards?

- Other advise for investment selection?

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2 hours ago, Rattle and Hum said:

@Sand you recently rotated into VTR and O (REITs which have recently sold off. have yields above 5%, and have a history of increasing payouts). Could you walk us through your methodology for finding a list to consider and ultimately choosing your investments? 

- Why REITs at this time over the other seven categories?

- Any particular sites that are helpful?

- Do you use an alert/subscription service to generate ideas?

- Do you use FFO, a debt measure, payout ratios and/or other metrics for weeding out the potential laggards?

- Other advise for investment selection?

Sorry - worked again today for way too many hours.  

As a note I added to VTR and O, not initiated positions.  I have held them for a while, since fall of '08, to be exact.  Both are the stalwart leaders in their category - O as a triple net lease company and VTR as an owner of retirement homes and associated elder care.  I like the VTR sector a good bit simply due to demographics - elderly population is growing.  I also bought SKT at the end of the year (just a shade in the red there) as the retail bloodbath is overdone (IMO), particularly for what SKT does (I am more leery on KIM).  I also hold some DLR (another market leader) and CHCT.

So why REITs right now?  Well, they're unloved.  The market drivers right now are heavily concentrated and some very good names are being left behind.  I'll gladly take a solid 4-6% yielding growing company.  On top of that REITs got a massive tax windfall in the tax bill.  Once that becomes known people will start holding them in taxable accounts - hopefully driving demand.

I read a lot of seekingalpha.  Brad Thomas and some others write a lot about REITs.  I generally look for solid companies that can remain solid in a downturn.  

No alerts or subscriptions.  I just read.  

I get interested when dividend yields for a particular ticker starts to get well above the norm for itself.  That means they're either in deep trouble and about to cut :cough:GE:cough: or they are being tossed aside.  Let's face it, if a ticker isn't a large growth company or a FAANG it isn't seeing these massive gains.   My small sector ETFs have lagged hard, for example - I posted about this in the regular stock thread.

Advice - just read a lot.  I try to weed out companies that look to have a high debt load or an unsustainable yield.  Or a company that isn't growing their yield (don't like T much because their increases are tokens - they've maxed out).  

So this is important to note given what we're talking about here.  In the last recession I read an article (which I've not been able to find) where a guy did a study and found that all but one company in the S&P with a yield of 6+% cut the dividend before the market turned in 2009.  Investing in high yield issues, particularly REITs and C-Corps, is dependent on overall economic conditions.  I really like this guy's articles as a basic look into when economic conditions start to change.  If macro conditions change this whole area sees pressure.  In 2008 some of these areas got absolutely smoked.

Also note that I invest the way I do for my own reasons.  Some folks here may be better off finding dividend growth companies, etc.  I'm at the point where my stash is on the cusp of FU money (as I define it for myself and my situation).   I want to be diversified and stable - with a beta well below one.  I'm looking for companies that will churn out dividends the same as they did in 2009.  I'm looking for issues that shed cash but keep things safe.  

Edited by Sand
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I like SDY as an easy way to do this.  I bought a bunch in around '11 and while it does not have a big dividend yield the appreciation on it the last few years has been awesome as well.  

 

ETA - JNK is also a good option for HY bonds.

Edited by Redwes25

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On ‎1‎/‎27‎/‎2018 at 1:55 PM, EYLive said:

You guys are speaking a foreign language to me. But I love learning this type of stuff.

HIGH! YIELD! INNNNNNN VESSSSSST MEEEEEENTS!

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My investing goal is to live entirely off of passive investment income - dividends (primarily) & interest - without ever dipping into the principal   So this thread is timely for me - thank you! 

As the dividend yield of the S&P500 is < 2%, I had been targeting 3%+ yield with companies that are pretty solid/stable and therefore *hopefully* won't ever cut their dividend (don't get me started on GE).  Some of my staple holdings have been T, VZ, DWDP, GILD, PG, & IBM.  T & VZ are the highest yielding at ~ 5%.  The others were all between 3-4% at time of purchase.

I own a modest amount of HCN, VTR and OUT - all REIT's with > 5% yield.  

With the recent success of GILD and DWDP, those yields have fallen well below 3% and I'm thinking of taking some of that profit out and augmenting my positions in the REIT's to increase aggregate income and get me closer to my goal.

Does this approach sound solid?  Am I missing anything?  What other high yield investments (REIT's or other) should I consider that may be more effective than HCN/VTR/OUT?  TIA!

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3 hours ago, audiophile said:

My investing goal is to live entirely off of passive investment income - dividends (primarily) & interest - without ever dipping into the principal   So this thread is timely for me - thank you! 

 

My goal for 2018 is to learn more about this space so we can do the same. What perplexes me is that it seems high-yield is as cyclical as equities. I was hoping to learn how to normalize returns while reducing risk.

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6 hours ago, audiophile said:

My investing goal is to live entirely off of passive investment income - dividends (primarily) & interest - without ever dipping into the principal   So this thread is timely for me - thank you! 

As the dividend yield of the S&P500 is < 2%, I had been targeting 3%+ yield with companies that are pretty solid/stable and therefore *hopefully* won't ever cut their dividend (don't get me started on GE).  Some of my staple holdings have been T, VZ, DWDP, GILD, PG, & IBM.  T & VZ are the highest yielding at ~ 5%.  The others were all between 3-4% at time of purchase.

I own a modest amount of HCN, VTR and OUT - all REIT's with > 5% yield.  

With the recent success of GILD and DWDP, those yields have fallen well below 3% and I'm thinking of taking some of that profit out and augmenting my positions in the REIT's to increase aggregate income and get me closer to my goal.

Does this approach sound solid?  Am I missing anything?  What other high yield investments (REIT's or other) should I consider that may be more effective than HCN/VTR/OUT?  TIA!

How much do you think you'll need in passive income a year?  

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11 hours ago, Tiger Fan said:

How much do you think you'll need in passive income a year?  

Targeting around $80k gross.  Definitely not there yet.

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28 minutes ago, audiophile said:

Targeting around $80k gross.  Definitely not there yet.

Interesting...how old are you?  Even at a 5% return, going to need $1.6M in there.  I've thought long and hard about this as well.  Curious to your strategy.

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Without getting too specific, stocks/dividends are by far the primary source; supplemented by a small amount of bonds, an annuity and an IRA that is RMD'ing (one annual pmt).

The annuity is fixed $/month and the IRA RMD amount is relatively fixed/consistent as well - depending on market conditions. 

So my opportunity to increase my income is going to be through the dividend channel.  That's why that was the focus of my Q's in my original post.  Any thoughts on *relatively* safe 5%+ income opportunities are appreciated.  Grats.

Edited by audiophile

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On 1/26/2018 at 9:56 PM, Sand said:

Studying drunk is much more fun.

So is sex, but you might pay the price many months later.  #nottheyieldyouwant

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