Protected Principal Retirement Strategy: The Quest For Perfection

| About: MFS Intermediate (MIN)

Is there a "perfect" stock - one that performs well in good times and bad? Sure, almost every stock appreciates in a bull market, but what about when the bear makes his appearance?

As I have mentioned in previous articles, I am concerned about the markets going forward. At some point our government's flawed fiscal policies are going to catch up with the stock market, and from what the pundits are saying, we could see a 40 or 50 percent haircut.

How do those of us that require a seven or eight percent yield on our portfolios cope with a potential downturn of this magnitude? Holding onto master limited partnerships that continue to increase distributions in both good times and bad and adding to positions at much lower prices is a starting point. But we need a place to put our funds that not only pays well, but also allows us to sleep well at night.

I believe I have found that "place."

Recently, I have reviewed every closed-end fund in hopes of finding a short list of those that not only perform well in both bull and bear markets, but also afford a yield consistent with our portfolio goals. I found one.

MFS Intermediate Income Fund (NYSE:MIN)

MIN is a closed-end fund that seeks a high level of current income by investing in short-term and mid-term U.S. government and high quality foreign securities. At a current price of $6.37, MIN pays a monthly dividend of $.044 for a present yield of 8.28 percent. Annual expenses are 0.71 percent, and the yield on the net asset value [NAV] is 8.60 percent.

The fund trades at a small premium to NAV of 3.92 percent. Normally, this would give me pause; however, the small premium is typical of this fund, and its other advantages far outweigh the negative.

Now for the good stuff.

The monthly distribution consists of income, long-term gains, short-term gains, and some return of capital. It has remained consistent in the $.044 - $.048 range every month for at least the past five years.

Looking at the fund's holdings we find 62 percent corporate bonds, 27 percent government bonds, and nine percent asset backed bonds. Credit quality is excellent - 19 percent are AAA, 12 percent are AA, 31 percent are A and 35 percent are BBB.

The top investment sectors are: corporate debt at 39 percent, foreign government debt at 25 percent, foreign corporate debt at 24 percent, and mortgage-backed securities at six percent.

Ninety-seven percent of the fund's portfolio is presently invested globally with the remainder invested in the U.S.

The funds performance is what really made my eyes pop. I tracked the price performance back to MIN's inception in 1993. Here is what I found:

  • 1993 +11.1%
  • 1994 -9.6%
  • 1995 +17.1%
  • 1996 +17%
  • 1997 +6.4%
  • 1998 +4.7%
  • 1999 -3.8%
  • 2000 +19.0%
  • 2001 +8.4%
  • 2002 +12.5%
  • 2003 +1.8%
  • 2004 +0.1%
  • 2005 +2.0%
  • 2006 +4.2%
  • 2007 +4.0%
  • 2008 +13.0%
  • 2009 +17.0%
  • 2010 +2.6%
  • 2011 +9.1%
  • 2012 +1.3%

During this period, the NAV declined in only two years, 1994 (-4.8%) and in 1999 (-1.3%)

Since I am specifically looking for a place to park cash during the rough times, I am not considering a large position in MIN while the markets remain in bull mode. I therefore took a closer look at MIN's performance in bear markets.

MIN has been publicly traded through two severe bear markets. From March 2000 through October 2002, the DOW dropped 49 percent. During these years the price of MIN increased from $6.13 to $7.11 or 16 percent. From October 2007 through March 2009 while the DOW dropped by 57 percent, MIN's price decreased by one penny, from $6.07 to $6.06, while the monthly dividend actually increased from $.025 to $.047.


Based upon past performance, the diversity of the fund's holdings, and the consistency of their monthly dividend I intend to consider MIN as a resting place for a significant portion of the Protected Principal Retirement Strategy portfolio should the forecast market downturn materialize.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: This article does not constitute a recommendation to either buy or sell any of the stocks mentioned.