Oh man, do bond yields stink. That's what happens when the Fed becomes the buyer of every last little bond on the market. So folks looking for fixed income have had to look elsewhere and those with limited risk tolerance probably are concerned about introducing too much risk into their portfolio. With that in mind, retirees and others looking for stable fixed income should examine these three selections for 2013.
But first, a quick look back at my picks for 2012. Ashford Hospitality Trust (AHT) was up 52%. The iShares S&P U.S. Preferred Stock Index (PFF) was up 10.2%. Finally, Kinder Morgan Energy Partners, L.P. (KMP) was essentially flat…but you did earn 5.6% in dividends (plus dividends on the other two stocks mentioned).
Business Development Companies are great resources for dividends, but they come with an extra net of safety. The managers of these companies do some hard-core due diligence before placing their investments into middle-market, fast-growing companies. I know because as a broker for private equity, I see how far they drill down. While BDCs raise some of their capital by going public, much of their initial capital comes from high-net-worth individuals who place their money into these private equity funds. They do this to gain exposure to the kind of middle-market opportunities the average retail investor doesn't have access to, and BDC managers do not want to lose their clients' money.
BDCs make mezzanine debt investments that yield in the teens and often get warrants along with it, so if the company hits it big, so does the BDC. They also offer their own expertise to the companies they invest in. They look for experienced management, positive free cash flow, good margins, strong ROA, niche markets within traditional businesses that have competitive advantages, and of course, an exit strategy.
You could investigate all the BDCs, but the way to go is to buy the UBS E-TRACS Wells Fargo Business Development Company ETN (BDCS). This way, you have a diversified group of BDCs, which protects you in case an individual BDC you choose suddenly gets lax in its underwriting, or unexpected shock waves hit the portfolio. The ETN yields a terrific 7.14%, and because BDCs must pay out dividends in the same way REITs do, you can count on this payout.
Another solid choice is the Preferred E Series shares of Ashford Hospitality Trust (AHT). Ashford is an extremely well-run hotel REIT, and one of the very few that did not suspend its preferred dividends during the financial crisis. Many investors are skittish about hotels because of their economic sensitivity. But the economy continues to grow at 1-2%, and inflation is actually good for hotels as it allows them to raise prices. Demand still exceeds supply for rooms, so hotels have pricing power, and RevPAR has been on the rise at Ashford for quite some time. The company's majority shareholders are also the CEO and his father, so they have a lot to answer to - their own money! Because this is a preferred stock, there tends to be very little movement of the stock price as it trades more like a bond. However, the Series E pays $2.25 in dividends annually, or about 8.4%. The company is financially solid so this dividend isn't going anywhere.
Finally, for all you widows and orphans, I'm going to go straight down the middle with AT&T (T). It's certainly not a growth stock, but that's not the goal here. What I want is a stock that will pay you a solid dividend no matter what. AT&T generates $14-$16 billion in free cash flow every year, and pays out about $10 billion of it in dividends. It makes a profit, has manageable debt service, and remains in fine shape even if it isn't a barn burner. It returned well over 10% last year including dividends. You'll get a payout of 5.3% in yield. You can't go wrong here.