My Take on Year End Investing

Going into the final trading days, history tells us that tax loss selling & other year end adjustments (i.e. selling) can be leading forces driving markets. However, this year, lessons from history have been thrown out the window. With the economy being caught up in a severe recession, not to mention a partial auto company bailout emerging, the future is unusually difficult to forecast. But I'm always ready to give my predictions.

Selling pressures from various year-end adjustments should be felt as the year closes. I'll be setting buying prices on target companies. The focus will be on those with long track records paying dividends. After the large market sell-off, there are many quality companies offering very high yields. The venturesome will look for securities with very high yields to lock up attractive dividends over the long term.

My preference is for companies with high yields such as MLPs, REITs and junk bond funds offering extremely high yields, some even astronomical. Very high yields bring high levels of risk. Even long track records of paying dividends do not provide assurance going forward. In the S&P 500 Dividend Aristocrats, only 2 banks remain of the 7 which were included in 2005. Bank of America (BAC), a Dow stock, was proud of its track record until it halved the dividend for Q4 (and there is talk that another dividend cut is coming). But locking up high yields for the winners can bring large rewards.

For the very venturesome, one MLP closed end funded investing in energy issues may be of special interest. Kayne Anderson Energy Total Return Fund (KYE) has fallen sharply to 9 in the market sell-off, increasing its yield to a whopping 23%. Obviously it's loaded with risk. In the last year, the underlying net asset value per share fell more than 50% to 13.43 (Nov 30, 2008). Rather than just investing in MLPs, the fund's description tells the story better than I can.

Besides MLPs, KYE also invests in U.S. and Canadian royalty trusts and income trusts, marine transportation, and other companies that derive at least 50% of their revenues from operating assets used in, or providing energy related services. The focus is on niche asset classes within the energy sector that are under-followed or misunderstood by the general investment community. KYE invests in publicly traded securities and up to 50% of their assets are in privately negotiated securities of energy and energy infrastructure companies.

KYE just announced it is redeeming 30% of its borrowings to reduce financial leverage. Then long term borrowings will be $165MM versus $438MM in net assets. In its 3 year history, the dividend has grown from under $2 to a present rate of $2.16. The extraordinary yield is pricing in a dividend cut next in 2009.

Its MLP investments should perform well. But the Canadian royalty trusts, high yield securities, are facing dividend cuts after price reductions in energy commodities. A modest amount (10%) is invested marine transportation, a very volatile business. So far, its dividends (based on cash flow) have at least have been holding. Going forward, the global economic recession can hurt profitability leading to dividend cuts. Overall, any dividend reductions in companies from their portfolios should do limited damage to dividends at KYE. Starting with a very high yield, even after a cut in the dividend, KYE can still provide a handsome return to shareholders. Of course, if the dividend is maintained, so much the better. Richard Kayne, their CEO, is bullish on prospects for KYE. A filing last week shows that he purchased 114,000 shares for $1.1MM (9.77 per share).

Meanwhile, the effect of the watered down auto bailout, a possible Tribune Company (TXA) bankruptcy filing and a super government stimulus package will be just 3 major unknowns for stock markets this week.

Stock position: None.

Comments

[Dividend Gr...:]

If you are looking to purchase an MLP fund, check out TYY or TYG.
Another thing to check is the annual management fee that will come out of your pocket every year..

2008 Dec 09 12:15 PM

[doubtful:]

I do not like the tax consequences concerning MLP's and the like. How are the dividends and/or capital gains of a closed end fund like KYE or TYG
being taxed? Can you enlighten? Thx.

2008 Dec 09 01:53 PM

[John Lounsbury:]

I think you are early on REITs. Even if the broad market lows of November 20 hold, I am not going to try to evaluate REITs until at least mid-year 2009. I expect I'll buy a bank before I buy a REIT.

On the subject of MLPs, they are much easier to own in tax advantaged accounts (IRAs, etc) to avoid the tax filing rats' nest.

2008 Dec 09 02:09 PM

[Dividend Gr...:]

The funds definitely make it easy for you during tax time, as they report it in a 1099, as opposed to K1.

2008 Dec 09 02:38 PM

[Delojozafado:]

Just a couple others FYI. I own all three, KYE as well as MTP, and BSR. Despite the Bear Sterns moniker BSR has held up the best. BSR being an ETF rather than an CEF may have an advantage. BSR has been a good trading vehicle of late as well swinging between ~$21 and +$24.50. A nice gain can be garnered if you pick it up on the cheap pre Ex-div and sell in the ensuing 4-6 weeks a couple points higher.

2008 Dec 24 09:02 PM

[User 100385:]

Please consult you tax accountant with regard to purchasing MLPs in an IRA. It's a terribly stupid idea.


On Dec 09 02:09 PM John Lounsbury wrote:

> I think you are early on REITs. Even if the broad market lows of
> November 20 hold, I am not going to try to evaluate REITs until at
> least mid-year 2009. I expect I'll buy a bank before I buy a REIT.
>
>
> On the subject of MLPs, they are much easier to own in tax advantaged
> accounts (IRAs, etc) to avoid the tax filing rats' nest.

Feb 26 02:39 PM