Panic selling late last week drove markets down sharply. Investors, in lemming-like fashion, fled the markets, plunging over the dreaded fiscal cliff even before its arrival. Congress, however, is notorious for kicking the can down the road, and it will likely do it again.
Even if increased dividend and capital gain taxes do kick in January 1, the frantic selling presents investors, especially income investors, with a rare opportunity: It is now possible to take positions in quality, growing companies and get paid 8% or more while you wait.
Investors not in the top tax brackets will be least affected as potential dividend taxes will not exceed your bracket percentage. See here for projected 2013 tax brackets.
Another consideration: Just where else today can you find the returns these high-distribution stocks offer?
Consider the following companies. Not only do these companies have distributions in excess of 8%, management has actually increased the payouts over the last year.
The first table lists 5 Master Limited Partnerships (MLPs). There undoubtedly are many worthy candidates not on the list, so my apologies if your favorite is not included. Feel free to mention it in the comment section if you wish
With MLPs, it's all about cash flow. The companies usually have heavy depreciation expenses so operating cash flow is a better gauge of fiscal health than P/E ratios.
Financial statistics are from Yahoo Finance.
|Symbol||Company||MC/OCF*||Yield at close 10/16/12||Comments|
|BBEP||Breitburn Energy Partners||8.7||10.4%||Oil and natural gas properties|
|CLMT||Calumet Specialty Products||4.7||8.6%||Specialty Petroleum products. Great MC/OCF ratio|
|EROC||Eagle Rock Energy||9.0||9.9%||Natural gas processing and transportation|
|LGCY||Legacy Reserves||6.9||9.3%||Oil and natural gas properties|
|LRE||LLR Energy||5.7||11.3%||Oil and natural gas properties|
* Market Cap/Operating Cash Flow - a liquidity gauge
Below is a table that lists five additional companies with high distributions. These companies also have all raised payouts in 2012
|Symbol||Company||Sector||Trailing PE/ Forward PE||Yield at close 10/16/12||Comments|
|MTGE||American Capital Mtg.||mREIT*||5.1/6.8||14.9%||Non-Agency MBSs - see mREIT paragraph below|
|SFL||Ship Finance Int.||Shipping||7.6/9.6||10.6||Oil and Chemical tankers, and others|
|PBI||Pitney Bowes||Office Equip||3.7/5.8||13.6%||Communications equip. and services|
|PSEC||Prospect Capital||BDC**||6.7/8.4||11.8%||Corporate financial services, monthly distributions|
|TICC||TICC Capital||BDC||5.6/8.0||12.1%||Corporate technology investments|
* Real Estate Investment Trusts, which hold mortgage backed securities (MBSs) instead of actual real estate.
** Business Development Corporations
Of course, the above tables in no way present a complete picture of corporate health. There are a myriad of other metrics that should be evaluated. Quality of management, geographic location, governmental policies, and industry outlook are just a few. Be sure to do your own due diligence before investing.
Nevertheless, it appears that most of the above companies, in addition to paying high distributions, have at this point the liquidity to continue the high payouts.
Many feel mREITs' profitable days will be ending soon with the recently announced QE3, which has the Fed buying MBS. Seeking Alpha has had many articles written on the subject, so be sure to read them before investing in mREITs.
Emotions often drive markets to extremes and now may be a great time to not follow the herd. It is rare to find high yields as noted above in today's low-interest rate environment.
Disclosure: I am long BBEP, CLMT, EROC, LGCY, LRE, MTGE, PSEC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.